Why a New Investment Property Can Turbocharge Your Tax Return

Why deductions are so important

When you invest in property, you can claim the costs of owning that property as deductions on your tax.

The more you can deduct, the less tax you pay. This can mean the difference between a negative cash flow property (one that costs you more to run than you get in rental returns) and a positive cash flow property (one that returns more in profit than it costs you to own).

These deductions fall into two broad categories.

1. Operating expenses. This includes the interest you pay on your investment home loan, council rates, utilities, levies and the cost of ongoing maintenance.

2. Depreciation on assets. This measures the decrease in value of your building and its fixtures and fittings (for example, kitchen cabinets and appliances) as they age.

Operating expenses will be similar for both new and established properties, except that there is likely to be more maintenance needed in an established home.

Depreciation, on the other hand, is very different. Changes to tax law mean that you can claim significantly more in deductions for a brand new property as compared to an existing one.

What is depreciation

Property depreciation recognises that over time, objects wear out and need to be replaced. It allows you to deduct the decline in value of your building structure, fixed items, plant and equipment.

Capital works

The capital works allowance refers to the building structure and fixed items. These include everything that makes up the structure, from the roof to the floor. It also includes items that are fixed to the build, like wood or tile flooring.

For buildings built after 1987, capital works are deducted at a rate of 2.5% per year for up to 40 years after construction.

If you buy a brand new build, you can deduct capital works for the whole 40 years.

If you buy a house that is 30 years old, you can only claim the deduction for the remaining ten years.

Plant and equipment

This refers to anything that is removable, as well as appliances. Common examples include carpets, split system air conditioners, ovens and window blinds.

Legislation introduced in 2017 means that investors can only claim depreciation on new plant and equipment.

For new builds, you can claim full depreciation on everything inside the build as well as the build itself.

If you buy an established home, you can’t claim any of the items that come with it. If you install a new kitchen or replace the carpet (for example) you can claim those in the future. Otherwise, you’re out of luck.

Taken together, the difference is huge. The deductions for new properties can be double or even triple the amount you can claim for established properties. If you’re looking for an investment that will help you keep tax low and return profits, a new build is a smart choice.