What Investors can Learn About Depreciation from the Block

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Monday, April 13th, 2015
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Television junkies and property enthusiasts who have been following the most recent series of The Block Triple Threat are no doubt sitting on the edge of their seats as they await the results of the auctions when the finale goes to air on Wednesday the 29th of April.

We’ve all watched and taken notes on the contestants’ work as they’ve hammered, painted and styled the original 12 units located on Darling Street, South Yarra into four luxury triple storey townhouses. But there is more to be learned from The Block than where best to place the bathtub or what colour cushions to place on a duvet.

For potential investors, the auctions of the townhouses also provide an opportunity to snap up what could be an underlying goldmine.

Any purchaser who intends to turn one of the townhouses into an investment will not only benefit from any rental income earned, they can also take advantage of deductions available for expenses involved in holding the property such as interest, rates, repairs and maintenance. An investor purchaser can also claim depreciation deductions due to the wear and tear of both structural items and plant and equipment assets.

To help explain further, let’s look at three lessons which can be learned about depreciation from The Block.

1. Depreciation deductions can be claimed for the building structure and the plant and equipment assets

If a property is income producing, the Australian Taxation Office (ATO) allows its owner to claim deductions in the form of depreciation.

Property depreciation falls into two categories: structural capital works deductions and plant and equipment depreciation.

Investors can claim capital works deductions due to the wear and tear of the structural items contained within a property such as bricks, walls, flooring, wiring, cupboards and bench tops. Deductions for these items will be based on the historical cost of the building and calculated at a rate of 2.5 per cent per year over 40 years.

There are some restrictions which apply. Capital works deductions can only be claimed for residential properties in which construction commenced after the 15th of September 1987. In the case of the Darling Street properties on The Block Triple Threat, capital works deductions will no longer be available for any of the original remaining structure. This is because the original units on the location were built prior to above date.

This doesn’t mean an investor won’t benefit from capital works deductions from the townhouses. Any additions made within ATO legislated dates entitle investors to capital works deductions. In the case of the townhouses, this includes any structural additions added by the contestants.

Substantial depreciation deductions can also be claimed for any plant and equipment assets found within an investment property. These are assets which can easily be removed. Examples include hot water systems, blinds, carpets, ovens, air-conditioning units and furniture.

The Block contestants have installed a significant number of new assets. Each plant and equipment item found within the townhouses can be depreciated based on an individual effective lifespan set by the ATO.

It’s a lesson for everyday investors to ensure that all depreciable assets in their investment properties are accounted for. A specialist quantity surveyor can assist by providing a tax depreciation schedule for any investment property outlining all of the deductions available for both capital works and plant and equipment assets.

2. If you’re planning on renovating, be aware this might impact depreciation deductions

As explained, any work completed or new additions installed can impact the depreciation deductions which can be claimed.

Another lesson everyday investors can learn from The Block is this: if they are planning on doing their very own Block-style renovation to an investment property, they should consult with a quantity surveyor who specialises in depreciation for advice first.

Specialist quantity surveyors will not only provide advice which can help property owners to decide which items to replace to maximise future deductions, they can also provide a depreciation schedule prior to any work taking place.

This is important as any items which are removed during a renovation, whether they be structural or plant and equipment, may have a remaining depreciation value. A process known as ‘scrapping’ entitles the owner to claim this remaining depreciable value for items removed within the same financial year as their removal.

A depreciation schedule before work begins will allow the quantity surveyor to perform a site inspection to take detailed notes and photographs of all of the original items contained within an investment property. This will act as evidence of an investor’s claims, including those for removed assets, should the ATO perform an audit.

An updated schedule is also recommended when a renovation is completed to any income producing property to capture new additions.

3. Depreciation deductions help to reduce tax liabilities and improve cash flow for investors

The most important lesson about depreciation an investor can learn from The Block, is how these deductions will assist the owner of the property to reduce their taxes and improve the cash flow earned from the property.

A depreciation estimate performed by BMT Tax Depreciation on The Block townhouses provides an example of the difference depreciation can make for an investor. An investor purchaser could claim a minimum of $39,986 and a maximum of $54,163 as an average first year depreciation deduction for one of the four properties.

Below is a summary of the estimated depreciation found for the four townhouses:

Click to enlarge

Click to enlarge

If a purchaser chooses to turn one of the townhouses into an income producing property, they will be able to use the depreciation to reduce their tax liabilities. The amount which can be claimed by an investor will depend on other factors such as other investments, other claims made and the income tax bracket in which they fall, but overall the investor will receive more money in their pocket.

The additional cash flow earned from depreciation assists investors to reduce loan liabilities, help to cover costs for necessary repairs and maintenance or even save for future investments.

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