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New builds a depreciation goldmine as investors shift strategy after tax reforms
As investors pivot to new builds in light of the federal government’s recent reforms, they’re set to benefit from a depreciation benefit of three times more than established properties.
The gap in depreciation benefits from new builds compared with established dwellings has steadily widened following a combination of rising construction costs and legislation changes.
A new analysis showed investors resorting to new builds following the federal tax reforms could possibly claim three times more depreciation than established property buyers.
The study, conducted by the Property Investment Professionals of Australia (PIPA) and MCG Quantity Surveyors, showed that depreciation tax benefits were more attractive to new-build investors.
MCG Quantity Surveyors managing director Mike Mortlock said the widening gap in benefits and the federal government’s restriction of negative gearing was likely to spark a gravitation to new builds.
Currently, new houses deliver $20,723 on average in the first year, versus $6,281 for established homes, while new town houses deliver $18,957 compared with $8,125 for established ones.
For units, brand new stock delivers an average first-year deduction of $23,124, compared with $6,526 for established units, a 254 per cent premium.
Considering the recent tax changes, for an investor on a 39 per cent marginal tax rate, a first-year deduction of $23,124 could translate into a tax benefit of more than $9,000.
Mortlock said that, when looking at a lifetime of deductions over 40 years, which was more than $599,000 for new units and nearly $492,000 for new houses, the long-term tax shield was substantial.
According to Mortlock, the shift towards new builds started in 2017 following legislation changes, which saw established property buyers restricted from claiming depreciation on existing plant and equipment assets.
“Further, the post-COVID-19 escalation in construction costs has significantly raised the capital works cost base for newly completed properties,” Mortlock said.
However, Mortlock raised concern about a likely push towards new properties, noting that investors shouldn’t assume every new build was a good purchase.
“In fact, this part of the market has often attracted spruikers, inflated pricing, and poor-quality advice, so investors still need to assess the fundamentals carefully,” he said.
PIPA chair Cate Bakos said the findings were valuable for investors in the transition to the new tax settings, but warned that depreciation should not be the only factor in a purchase decision.
“Depreciation can strengthen cash flow and, under the proposed reforms, provide a powerful future tax shield, but it’s not a substitute for investment fundamentals,” Bakos said.
She warned that an asset still has to stand on its own merits, including location, scarcity, demand, quality and long-term growth potential.
“Depreciation enhances a strong asset, but it doesn’t rescue a weak one,” Bakos concluded.
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