19 Mar House vs unit for depreciation – Brad Beer
This week we look at why depreciation allowances are higher on units. This can be very helpful if you are planning to make an investment purchase or to add to your existing property portfolio. Brad Beer – our depreciation expert – gives us the good oil.
Kevin: Investors might be curious to know whether there is any difference in the depreciation deductions that they can claim for a house versus a unit. This type of information can also be useful for those tossing up their options when planning to make an investment purchase or to add to their existing property portfolio.
Brad Beer from BMT Tax Depreciation, which type of residential property – houses or units – generally provides more depreciation deductions for investors?
Good day, Brad. How are you doing?
Brad: Great, Kevin. Great to be here as always. Interesting question, and a couple of things to consider to start with. One is that I’m the depreciation guy, but depreciation is not your only reason for buying one or the other.
A lot of people think that the houses will actually have high depreciation. If you talk to people outside of the people who know – me and my guys – they’ll think houses get more deductions, but it’s actually generally not the case. Units actually generally get more. There are more deductions for units than houses usually.
Kevin: What’s the reason for that?
Brad: The reason is that the depreciation that you claim doesn’t really relate to the value of the property; it relates to the cost of construction of that property and the things that are in that property that you can claim – the plant and equipment.
When you buy a unit, you buy a bit of land, you buy a bit more construction, but you also buy a lot of common areas. You pay for a portion of the underground car park, the lift, all those sorts of things. So, there is more construction cost in a unit as a percentage of your buy than there is in a house.
With a house, you get a big piece of land. With a unit, you get a little piece of land, effectively.
Kevin: Common property, you mentioned that, and you’ve given us a couple of really good examples there. Are there others that you can give us? And is it all about the common property? Is that why?
Brad: It’s a combination of things. The fact that when you buy a unit, whatever you pay for it, a lot of what you’re buying is actually the unit because you’re only buying your portion as a percentage of the small piece of land that the block of units sit on, but the other thing is those common areas.
Lift is a good example, because it’s a plant and equipment item, so you get to claim it quicker. Underground car park is just a highly expensive item, and it is part of the building that you get 2.5% of. But there are a lot of those things that all add up.
Things like swimming pool filters, gym equipment, washing machines if they exist, automatic garage doors that are usually a bit more expensive than the one on your residential house, everything that’s in the common area, you own a piece of, so you get to depreciate your piece of it.
Kevin: You mentioned car parks, and quite often, these car parks are underground. I’ve actually seen some where they have to have some fairly expensive pumping equipment installed as well for land flow and overflow and that sort of thing. It really can mount up, And even the cost of lifts is quite high, isn’t it?
Brad: The cost of a lift is high, and also because they’re plant and equipment, you get to claim them a bit quicker.
When we do a depreciation schedule on a house, it has a list of items – the stove, the carpet, and things – whereas if you’re in a large, multi-unit complex as you’re talking about there, these pumps downstairs that pump out the water should something go wrong are plant and equipment items. They have a value. You get your portion of those. Everything that’s down put in that car park, you get to claim a piece of, effectively, pretty much.
Kevin: Can we talk about another issue? And that is the age of the building. How does that have an impact on the deductions that a quantity surveyor is going to find, whether they are looking at a house or a unit?
Brad: Whether you are a house or a unit, the age of the building does have an impact on the deductions you’re able to claim. The first thing I’d say is I almost don’t want to give you the important dates because the simple thing is [4:16 inaudible] going to get deductions, because regardless of the age of the building, you may or may not have much deductions. Ask the question first rather than trying to work it out yourself.
However, we will talk about the age a little bit. There are two parts of deductions you are able to claim. One is the deduction on the structure of the building, and the other is against that plant and equipment, just like we’re talking about lifts, etc. In order to claim on the structure of the building, it needs to be built, if it’s residential, after 1997.
With our Budget changes last year – the federal Budget in May – that plant and equipment in a secondhand property is not even claimable anymore, so there are a few more things that the age comes into as an important question.
But still, what I say is whatever the age of the property is, you ask the question and if you’re crunching your numbers, one of those questions you have to ask is “How much are you going to pay for it? How much interest am I going to pay? How much depreciation will I get?” Something built after 1997 now gets more than something before 1997, which has always been the case, but it’s now more the case based on something you’re looking at now.
The important thing is as you’re looking at properties, yes, newer gets more, after 1997 gets more, but it still comes down to use the simple tools, get a simple estimate of these things, crunch the numbers overall before you go ahead and look at the purchase. Age will be an important little piece of that question, one of many you have to ask yourself.
Kevin: Very valuable information. Brad, thank you so much. Brad Beer from BMT Tax Depreciation. Thanks for your time, mate.
Brad: Thanks, Kevin. Always a pleasure.