Unfurnished Versus Furnished Properties and Depreciation

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Thursday, November 13th, 2014
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When an investor first decides to put their property up for rent, often he or she will weigh up whether it is better to rent the property unfurnished or furnished.

Making this decision will largely depend upon the circumstances of the individual investor and the type of property they are renting. There is, however, a number of advantages and disadvantages an investor can take into consideration before making their decision.

Obvious disadvantages include the initial cash outlay an investor would need to spend to furnish the property.

On the other hand, furniture can make the property look much more appealing to potential tenants and help to reduce the time a property is vacant when untenanted due to the tenant’s ability to move in straight away. Furnishings may also increase the weekly rental value of the property.

One advantage investors don’t often consider when deciding whether to rent a property furnished or unfurnished is the additional depreciation benefits these assets can generate above a normal depreciation claim.

Any removable plant and equipment asset entitles the owner of the property to depreciation deductions. These items are depreciated based on their effective life as set by the Australian Taxation Office (ATO) and the deductions claimed can make a significant difference to an investor’s annual cash flow. Some examples of plant and equipment items include dishwashers, ceiling fans, clothes dryers, garbage bins, curtains, blinds, light shades and furniture.

The more of these assets there are, as identified by a specialist quantity surveyor when completing a tax depreciation schedule, the higher the depreciation deductions the owner will be able to claim.

The following example helps to explain how depreciation is calculated for an investor who owns a property purchased for $420,000. In all three scenarios, the property owner is receiving a rental income of $490 per week or $25,480 per annum.

In the first scenario, the example shows the property owner’s annual cash flow without a depreciation claim. In the second scenario, the investor has rented the property unfurnished and a specialist Quantity Surveyor has found $11,500 in depreciation deductions for the property owner. In the third scenario, the property is furnished and the Quantity Surveyor has found $16,500 in depreciation deductions from these assets.

depreciation table

click to enlarge

Whether the property is rented unfurnished or furnished, depreciation will make a significant difference to the property owner’s annual cash flow when compared to a situation where no depreciation is claimed at all.

In the scenario without depreciation, the investor is paying out $79 per week. By claiming $11,500 in depreciation for an unfurnished property the investor will turn the loss to an income of $3 per week, while the depreciation claim of $16,500 for the fully furnished property will turn the loss of $79 per week into an income of $38 per week. Over a year, this represents a saving of $4,255 for an investor who rents the property unfurnished or $6,105 for an investor who rents the property furnished.

It is recommended that property investors always seek advice from a specialist quantity surveyor on the depreciation available for both structural items (capital works) and the plant and equipment assets a property contains. A specialist quantity surveyor will use his or her knowledge of ATO legislation to produce a tax depreciation schedule which ensures the maximum deductions are found for the property owner.

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