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Invest new or second-hand?

Invest new or second-hand?

How depreciation differences may affect your return

On 15 November 2017, Parliament passed a significant change to property depreciation legislation. Owners of non-new residential properties, for which contracts exchanged after 7.30pm on 9 May 2017, will be ineligible to claim depreciation on plant and equipment assets, such as air-conditioning units, solar panels or carpet.

It is important to note that these changes affect plant and equipment assets found in second-hand residential properties only; plant and equipment in new properties will still be depreciable.

This is great news for residential property developers who have another reason to differentiate their product from other properties on the market. Furthermore, developers will have a six-month grace period in which they will be able to rent out the property (if it doesn’t sell quickly) and still be able to sell to an investor who will retain full depreciation entitlements.

Prospective property investors therefore have the potential to receive higher levels of depreciation deductions if they take the decision to invest in new properties.

The following example, from quantity surveyors BMT Tax Depreciation – specialists in their field – provides an estimate of the likely deductions for a new residential unit versus a two-year old residential unit, both purchased for $700,000 after 7.30pm on 9 May 2017.

New residential unit, purchase price $700,000

Likely deductions after 9 May 2017
First full year               $14,600
Five year total             $59,800

Two-year old residential unit, purchase price $700,000

Likely deductions after 9 May 2017
First full year               $8,200
Five year total             $41,800

NOTE: This example is provided as a guide only and independent tax depreciation schedules should be conducted for all investment properties on a case-by-case basis.

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