As we all know, Australian's are obsessed with property.
Whether it be bragging about their recent capital growth or the benefits of negative gearing, it's hard to have a BBQ without some chat and banter about the property market.
It is the Australian dream after all.
And really the Australian dream is to own not one property, but at least an investment property as well.
Because, negative gearing, that's why! Oh, plus keeping up with the Jones's.
While most people are knowledgeable about negative gearing, typically people are less across the finer details of how to maximise the negative gearing benefits when buying an investment property.
This leads to people going out and buying any old property, thinking it will have the same benefits that their friends at the BBQ have been bragging about for years.
The detail that is missed is that if you purchased an established property after 9 May 2017, or convert your existing property to a rental property after this date, you are no longer able to claim the depreciation on assets such as stoves, ovens, dishwashers, curtains, blinds.
The value of these assets can be significant and previously enhanced the deductions available to property investors.
However, brand new properties attract depreciation on those assets, which can make new properties more attractive for those seeking to maximise the benefits of negative gearing.
There is a catch though, even with brand new properties - if you use your brand new property for a non-taxable purpose, assets such as stoves, ovens, dishwashers, curtains and blinds etc become second hand property, and are no longer deductible. This is a particular issue for investment properties where the property is a holiday home with private use by the owners.
So how much are we talking about here? Let's say you buy an established apartment for $500,000. You get a Quantity Surveyor to inspect the property and estimate the cost of your new stove, oven, dishwasher, curtains, blinds, dryer etc. They do up their report and tell you that the value of those assets is $25,000.
Assuming an effective life of 8 years for each asset, this is depreciation of $3,125 per year you are foregoing. If you are a high income earner paying tax at 47%, that's a foregone tax saving of $1,468 per year for 8 years - or $11,750 over 8 years. No small amount.
This change in policy, in my opinion, is making second hand property less beneficial from a negative gearing perspective. That being said, tax should not be the main driver when making investment decisions.
And you certainly should be careful not to buy a brand new property just for the sake of depreciation, especially if it means foregoing stronger capital growth that may come with buying an established property or buying in a better area.
Regardless of whether you buy an established or a brand new property, you can still claim depreciation of 2.5% on the building itself, provided the building is not more than 40 years old. However, older buildings were cheaper to make, which means less depreciation to claim here as well. Another Catch-22 for the established property.
What this means is that the negative gearing benefits are often not as great as have been achieved in the past, as less assets are depreciable. Less depreciation means less deductions means less tax saved.
Combined with historically low interest rates, a lot of people find their investment properties are no longer significantly negatively geared.
As with everything ATO related, there are some exceptions:
This change in policy applies to assets you entered into a contract to acquire at or after 7:30pm on 9 May 2017, or for any assets you had used for private purpose in the 2016/17 financial year or earlier, where you did not claim a tax deduction for the depreciation in 2016/17 financial year. I.e. if you convert your home to an investment property after 1 July 2017, you cannot claim depreciation on those eligible assets.
Second hand properties used in business can continue to claim depreciation on assets such as stoves, ovens, dishwashers, blinds etc.
If a taxpayer buys an established property and then installs new assets such as a stove, that asset can be depreciated, provided it is not used for a non-taxable purpose.
These changes generally apply to individual taxpayers and trusts.
As usual, the devil is in the detail, so seek the help of a qualified professional advisor and select a property that helps you achieve your financial goals.
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