One of the most significant trends in the Australian property market has been the movement away from traditional family homes to higher-density living. How does this impact on investors?
Blogger: Paul Bennion, Managing Director, DEPPRO tax depreciation specialists
The trend has been confirmed by the latest ABS figures that show building approvals for higher-density homes – such as apartments and town houses – surged by 36 per cent over the past year, while approvals for traditional houses actually fell by 1 per cent.
It is also very significant that these ABS figures for February 2015 reveal there were nearly as many building approvals for higher-density homes (9,102) as houses (9,441).
Major changes in demographics, such as more people living alone and smaller families, are driving the rising demand for higher-density living.
This long-term trend towards smaller household sizes is underscored by the fact that in 1911, the average number of people living in a private dwelling was 4.5. It then fell to 3.5 by 1966 and is now about 2.7 people per household.
Australian property investors have been capitalising on this trend by buying higher-density homes in greater numbers in recent years as rental demand for this type of higher-density living grew with the changing demographic dynamics.
Anyone considering buying an apartment for investment purposes should consider that the peak sales activity for these homes tends to be around the start of the new financial year.
This trend is underlined by the fact that more than 60 per cent of the property depreciation reports that DEPPRO prepares are during the months from June to September.
However, the number of depreciation reports we undertake for investors who buy an apartment tends to peak during July and August, because many people decide to buy an investment unit after visiting their accountant at the start of the new tax year.
Indeed, many of the depreciation reports we prepare for clients who purchase an apartment are completed to maximise their tax benefit, in line with the start of the new financial year on 1 July. Completing tax returns focuses the mind on the tax advantages of owning a property, such as negative gearing and depreciation.
This means anyone thinking of buying an apartment for investment purposes should decide now, rather than waiting until activity in this sector of the property market increases later in the year.
While there are many issues concerning depreciation entitlements on properties, in most cases strata title homes such as new apartments provide a higher rate of depreciation than houses, all being equal.
Some clients are seeing tax benefits obtained through depreciation can be equivalent to 60 per cent of the property's total purchase price of the property, which represents tax benefits totalling $300,000 based on a purchase price of $500,000.
A key part of ensuring the investor obtains their full tax benefit is to have a depreciation professional prepare a comprehensive depreciation schedule. Even an older-style apartment can qualify for substantial tax depreciation benefits if a depreciation schedule is undertaken for the property.