Depreciation on Building

[ivankram]

I have read this and know it to be true. BUT is this really true,

For Australian residential properties built: Rates
Before 17-Jul-85: 0.0%
Between 18-Jul-85 and 16-Sep-87: 4.0%
After 17-Sep-87: 2.5%

So if my property was built in say 1986 I get 4% Depreciation, but if it was built in 1984 would be claiming 0%.

This does not seem logical, but hay, good knowledge to use when your looking for property.

So buy a house made between those dates and your on a winner, or am I missing something?

 

[geoffw]

Ivan,

I wouldn't look on this as a selection criteria, but a bonus.

Some thoughts.

1. It's based on original building costs (excluding land). 1985 pricaes are not much compared with now.

2. A 1986 building at 4% has 25 years to run. After 2011, no more depreciation.

3. Stuff done to the building since it was built would count for the allowance at the rate accorrding to when it was done

4. Contents depreciation (aircon, caprpets, kitchen, etc) would depreciate much faster that the building. A place renovated by a DIY person may well have heaps more depreciation available to you that building.



A building from 1986 which is worth $400K now might have had a building cost of, say, $50K (plucking figures). So depreciation at 4% is worth $2K pa depreciation.

But a similar one built in 1998 may have now cost $200K. Depreciation @2.5% would be $5k pa. And you will get that for 35 years, not just 8.

This is not an example of how things should be- just an example of how you may crunch the numbers. Different numbers can change the sceario completely (of course).

Also, don't forget the depreciation means that the value of the asset is declining- and will have to be replaced. At your cost- sometime.

 

[ivankram]

Thanks Geoff

You know your stuff.

You have given me motivation to buy a newer IP, where I can claim and make the numbers stack up for me.

I've built an excel IP analysis today and will play around with the idea of depreciation more.

Thanks.

 

[geoffw]

Ivan,

Depreciation should not be the primary thing you look for. All the numbers need to work. If depreciation helps a little, it's a bonus- though remember

1. The laws regarding what you can claim may be varied in the future

2. You'll lose some of the tax benefits when you sell (ie, what you've claimed in depreciation over the years will be taken away from the cost base).

On the second point, there's a few things to bear in mind

1. If you don't ever sell you don't have a problem
2. Tax on CGT is on 50% of the CG if you've had the property for more than 12 months- so you will probably lose less than what you gained by claiming depreciation
3. You may be able to defer the sale until a year when you have lower taxable income. It may be, for instance, that when you sell that one property in 10 years time, you have acquired 10 more properties, all being depreciated, putting you into a low bracket.