There is so much attention in the media about the recent federal budget changes to negative gearing that I need to be frank with you about a couple of things.
Firstly, the world is not coming to an end because of changes to depreciation and secondly, if you invest in property to save tax, get out now!
Let me try and explain it to you in simple terms…
Currently when we (investors) purchase a property, we are able to obtain a depreciation schedule from a quantity surveyor. We give this to our accountant at tax time and he/she uses it as a paper loss against the investment income.
This ‘paper loss’ is made up of a) the depreciation on plant and equipment assets (aka chattels) and b) depreciation on the building. In other words, the schedule basically has 2 columns, one for chattels which is made up of things like, the kitchen cabinets, appliances, floor coverings, window coverings, doors, tap wear, bathroom and shower fixtures…etc, etc (I think you get the drift).
Then there is the second column which is for the building.
You see, the reason for the breakdown on items is simple.
The building lasts longer than let’s say the kitchen sink so the sink is depreciated over less years than the building. Same can be said about all the other chattels and this is why the government allows investors to depreciate chattels for up to 12 years whereas the building is over 40 years.
With that said, under the current system, if you bought a brand-new property eight years ago and then decided to sell it to me, you would have had the benefit of depreciating the chattels over those years.
And then I come along and buy it from you, obtain a new depreciation schedule and again claim the full five years’ depreciation on the same chattels.
It’s almost a double-dip so you need to ask yourself, does this sound fair? I guess so as the government has allowed it to go on for years.
So the federal budget changes to negative gearing will stop this from going on.
If you already own property investments, then you are not impacted! Hooray, you can sleep tight knowing that you can still max out your tax benefits at the end of June each year.
If you happen to buy an investment property from the 1st July when the new legislation is in force, then you cannot claim the full tax benefit of chattels on old/older properties if the property was previously owned by investors.
Don’t panic! Just relax!
It’s really simple, if you need depreciation to help you sustain your new investment purchase then, buy only new properties so that you can claim the full depreciation schedule.
Not only will you get a better tax write off, you also have a new property that will give you little to no maintenance issues to worry about.
And besides, tenants tend to prefer new properties than older ones and are often prepared to pay more for it.
So by buying new stock only, you get a:
- Bigger tax break,
- Happier tenant, and
- Potentially more rent or cashflow.
I see it as a win, win and a win. 😊
My point really is to help and support you in not stressing about things and I understand that you may be concerned because it is new legislation and you may not be fully aware of its consequences.
But let’s face it, that is why you need to keep track of your budget and have a buffer in place… to help you manage the changes that occur from time to time with your investing.
Whether it is a life changing event such as a marriage, death, illness, divorce etc or external changes such as government legislation. You need your buffer to help you smooth the transition while you strategise your next step – and do it stress free.
People make some of the most stupid decisions while under financial stress and I prefer to educate you on how to create real wealth while enjoying the process.
There is no dress rehearsal to this life, so I’d prefer you worry less by having a strategy in place and enjoy what life has to offer…good health, friends, family and making memories.
Until next time… stress less and invest more! 😊