Tax depreciation estimating – The value of having your finger on the pulse

Back in the day, tax depreciation was not a service that quantity surveyors offered. In fact, it’s an industry that’s not much older than 21 years whereas quantity surveying in general can be traced back to at least 1859 but possibly 1785. Sorry, you’re right, you didn’t ask. Anyway, my point is that most quantity surveyors don’t do tax depreciation. The largest QS companies in Australia and abroad are traditional quantity surveyors that are more specialised in estimating, contract administration and project management than depreciation. Most established firms that specialise in depreciation once started in traditional estimating but moved over to the tax side of things and abandoned that service. There are surely also companies that popped up just doing depreciation. That’s all very well, but I think both are neglecting a key advantage to maintaining a traditional estimating department.

There are probably three factors that merge to assist an estimator. Experience, cost databases/libraries and current project data. Companies that don’t maintain an estimating department are missing the third component. Here’s why that matters.

In our business for example, I’m the tax depreciation guy. I’ve done it for as long as I dare admit and we run a department that specialises only in tax depreciation. On the other side of the business are our traditional estimators. One of the key differences is that on the tax side, we’re almost exclusively working on projects that have been already built, and often built tens of years ago. On the estimating side, they’re almost exclusively working on things that are about to be built or are coming out of the ground right now. The tax side of the business benefits hugely from that.

Why? Simply because the cost data we have access to is minutes, hours and days old, rather than months and years old. Working in cost control for current projects under construction gives us access to progress claims that developers are making to the banks, showing us the details of what each stage of the building is costing them. It goes right down to the individual trades too where we can see how much painting costs per square meter and how much the labour component of carpentry is costing for example. Without this information, we’d be relying on cost databases that come out yearly at best and due to the pace of price movements in Australia, the costs are technically already out of date.

It’s true that the tax side of our business does work on projects where the total construction cost is already known, but based on the data gathered within the system, that only happens 14.3% of the time. Even when it does, the level of detail often never goes past just the total cost.

I guess there’s a lot of ways to spin your point of difference, but I firmly believe that working with a firm that has a traditional estimating department presents real advantages on the tax depreciation side, and in turn, better depreciation.

It’s all in the timing – When to organise a depreciation schedule

Once people have been rebirthed into the glorious world of depreciation boosted property investing, their next question is; ‘When should I organise the schedule?’

If I can cement one thing into your brain, let that be this answer:

Now.

What I’m getting at here is that people can get seriously caught out by putting it off, and then missing out on some claims. You can normally only back claim two financial years, and you’ll generally incur a fee to amend your prior returns. So, really the sooner the better.

Getting a little more specific, people ask these two questions about timing;

1.       Should I wait until after settlement? and

2.       Should I wait until after I finish (insert works here).

Starting with question one, settlement will almost certainly be the start date for the report, so we cannot complete it until this date is at least set in concrete. However, it need not have occurred yet. The one caveat is that the property must not change between our inspection and settlement, but this is typically a period where no work is done anyway. Putting that issue aside, the only issue left is access.

A lot of the time we’re able to organise access to inspect a property prior to settlement, so there’s no need to hold off getting it done. In fact, inspecting pre-settlement normally means the property will be vacant, or at least an inspector won’t be upsetting your tenants by showing up a few days into their shiny new lease. Note: we do try not to recruit upsetting characters (sadly, some slip through into senior management), but even the most charming and swift quantity surveyors can sometimes be an unwelcome guest in a tenant’s new home.

You’ll also find that sales agents can be quite obliging if they know it’s ensuring a smooth transition to settlement with a happy buyer, so they can be a great resource for early access. So, there’s no need to hold off calling your QS for a schedule and if we cannot get access until after settlement, it will likely be right afterwards, which means everything is squared away nice and early.

On to questions two, should you wait until certain works are done?

In the old days, certainly the opposite was the case. If there were any items that could have been scrapped, we’d want to see them before any renovation in order to estimate their value. For the subsequent works? Generally, you’ll know what’s being done, the date it’s being done and the cost. So, if you’re adding blinds to the property, if you have a receipt, we won’t need to physically see them in place. We would rely on your documentation to say they went in today at a cost of $3,000 for example.
However, if there are major works being done that will be a mix of building structure additions and plant and equipment additions, chances are you won’t have a breakdown of the costs, and we will need to inspect the works in order to estimate the breakdown of values.

 

In conclusion, there’s not often an argument for holding off obtaining a depreciation schedule, quite the opposite. However, a quick call to your friendly neighbourhood QS will always point you in the right direction.

Why would a Quantity Surveyor be the life of the party?

Listen. I’m a Quantity Surveyor (QS) who specialises in tax deprecation so, frankly, I’ve heard them all:

Q. How can you tell if a QS is extroverted?
A. In conversation, he looks at your shoes instead of his own.

Q. How does a QS make a bold fashion statement?
A. He wears dark grey socks instead of light grey.

Q. What’s the difference between a QS and a lawyer?
A. The QS knows he’s boring.

And the painfully popular:

Q. What does a QS use for contraception?
A. His personality!

Well, folks, I’m here to explain why this is a raw deal. I refuse to see my profession labeled as the last picked when guests lists are made up. I tut-tut at the notion QS’s make semolina pudding look like a gourmet option. I refute that a QS can talk a street sign into a coma.
The fact is your QS is one cool cat and will be the life of your wealth-building party, so stop cutting them off at the velvet rope and check out the sweet moves they cut on your financial dance floor.

Saucy schedule
The thing about your QS is while all of the hipster also-rans of investing are trying to make themselves look good – talking a big game but failing to deliver on the financial fun stakes – your QS is all about making the good times sizzle.
When it comes to wealth building, we carry our import with confidence and command respect from the spreadsheet.
Why? Well… we’re the money!
Your QS is key to unlocking thousands of additional dollars each year – and you barely need to do a thing.
Now I know what you’re thinking, “Even the name ‘depreciation schedule’ sounds depressing!” but that’s because this wallflower document gets a bad rap. At my soirees, nobody keeps a QS in the corner.
Depreciation schedules allow property investors to claim the depreciating costs associated with their investment against their annual income.
And those schedules are the perfect invite because they’re the last guest to leave and they help with the cleaning up. Generally, a schedule is useful for about 40 years, so that is extra cash in your account for four decades if you don’t sell.

The money shot
We recently completed a comprehensive study of 1000 depreciation reports, which found that the average deduction was about $9414 in the first full year.
Do you know how many Jatz Crackers and French Onion dip you can buy for that sort of coin?
Unfortunately, the ATO is the fun police at this gig. They won’t just hand you a cheque for $10k, but rather reduce your annual taxable income by that amount.
The upshot? You pay less tax which is music to everyone’s ears.
To give an example, let’s look at an investor who earns $100,000 per year.
If they don’t have any deductions, they’d be liable to pay $24,632 in tax every year.
However, in the first year of owning an investment property, they can engage a QS to prepare a star-studded depreciation schedule and reduce their taxable income by $9414, according to our study.
As a result, their tax liability drops by about $3500, which means it’s ‘Celebration time, C’mon!’
Sensational property investment is all about the long-term, so if an investor was able to hold that property for 40 years – the life of the schedule – they’d be able to claim average deductions of $192,158.
That kind of money would cover a week on a Barrier Reef superyacht with catered dining for you and 10 of your closest friends.

Why you should ask the QS to arrive early
The first couple of years of owning an investment property are generally the most expensive for a landlord.
It’s during this initial period when the rent is not usually enough to cover the mortgage repayments and other costs such as owner corporation fees and council rates. The result is negative cash flow – or more money going out than coming in.
What a buzzkill!
However, that situation can be remedied by having a depreciation schedule prepared for your property. It helps carry you through those lean years by putting dollars back in your wallet each EOFY.
In time, your rent will grow. Once it’s covering your costs nicely, any tax return might be used for something sexier than plugging up a temporary cash flow hole.
Crank up the volume because I feel big fun ahead.

The serious bit
This has all been a bit of a laugh but it is important to understand that everyone’s situation is different because of varying incomes, types and ages of investment properties, as well as the reality of tax rates changing over time.
That said, our study shows what the average deduction looks like and is a solid barometer of how quantity surveyors can make you money while you party likes it’s 1999.
My recommendation is to talk to us – we can show you why knowing the numbers and applying the schedule can create the most thrilling of results.

My favourite QS BS – The top three furphies spouted by the depreciation industry

As a Quantity Surveyor or QS if you will, I have the pleasure of a little inside information when it comes to reading some of the articles or catch phrases written by other quantity surveyors. No sour grapes here, for the most part we all get along. I have some great relationships with a number of owners of QS firms, some I consider genuine friends. However, it’s probably about time I call out some of the BS (I’ll let you figure that acronym for yourself) that has been spouted for years by depreciation companies. I think as an industry we can do better, and I just can’t stomach BS statistics and people being misled. So, here’s my top 3;

  1. 80% of property investors are not maximising their depreciation deductions

What a great statistic, it’s a shame it’s not based on any research or indeed, true.

I’m not quite sure exactly where this line came from but if you google it as a phrase, you’ll see it quoted by major media outlets and property businesses. I’m talking the big names.

Why am I calling BS? A number of reasons namely;

  • This research cannot be found. It’s often prefaced by “research suggests” but see if you can find it yourself. I’ve spent many an evening trying (tip: decline an invite to a dinner party at my house if the situation ever arises).
  • This number has never changed, yet this has been flying around the internet for at least a decade.
  • Given all the attention given to this statistic, shouldn’t that number be dropping? Have the people that started saying this failed in their mission?
  • I’ve spent over a decade educating people on depreciation entitlements. It hasn’t just been me either. Far more important people and businesses have been doing the same, like accountants for example. I can tell you anecdotally that investors are so much more educated about depreciation than ten years ago, and that knowledge is increasing.

It would be great if we could just agree that this line has had its decade in the sun and maybe come up with some new material.

  1. The average deductions investors can claim in the first full financial year is around $5,000 to $10,000.

Firstly, look at the language of this one. Anyone else have an issue with the word ‘around?’
This one actually led me to set the record straight. If you can excuse a little trumpet blowing, I embarked on a mission to find the exact figure a few years ago. We analysed our latest 1,000 residential depreciation schedules and found that figure to be $9,183. We were the first quantity surveyors to ever publish actual average deductions, along with a number of other statistics. Ok so that figure fell within the range, but it depends on the time period. We ran a similar test of reports completed after the budget changes to depreciation and came up with a different number, one of which was above $10,000.

The problem is the lack of actual information. Whilst I’ve not yet had the time to publish a whitepaper on our research, at a moments notice I can have it independently confirmed. Additionally, when you conduct this research you also encounter the problems with it. For example, we’ve had clients only want division 43 or building only schedules done, when they were actually also entitled to plant deductions. We excluded this from our research because it was out of line, or to put it another way, not a true representation of what that investor was actually entitled to. There are a number of other examples I won’t bore you with, but as we share this data, we’ll note some of the criteria applied to it in the small print.

  1. You can claim up to 60 percent of your investment property purchase price as depreciation

This is one of the worst ones, and you’ll see that number change. The Australian Institute of Quantity Surveyors (AIQS) has warned us that factoring the purchase price into an estimate of the depreciation is not the correct methodology or starting point. So, this percentage is fairly meaningless. Take for example a house built in the 1960s in Sydney with no renovations and a view of the harbour. In fact, we did a report on a seven million dollar house in a similar condition and the deductions we’re just getting us across the line. In percentage terms we’re talking 0.02% of the purchase price.
Now consider two units within the same block. One has a view of the water, the other a carpark. The depreciation should be the same if all other things are equal, but as a percentage of the purchase price they’re worlds apart. That’s why I tell people that this percentage of the purchase price is not a metric that should be relied upon at all.

Now, why is it garbage? What they’re saying is that up to 60% of your sale price is likely to be building and plant and equipment items. What I don’t understand is the cap. There’s no legislation to say there’s a maximum percentage of the purchase price.

Consider an out of line or distressed sale, and these are fairly common with commercial properties. Or even a house sold to a family member cheaply. Some accountants have argued with me on this, but I’ve prepared schedules where the deductions were higher than the purchase price? Why? We estimated the construction value of the property, and we didn’t care what someone paid for it. If you bought a brand new shopping centre for ten million but it cost eleven million to build then good for you, but your purchase price didn’t change the construction cost. I’m no accountant and maybe they weren’t comfortable using our estimate, but we stand by it and are called upon as expert witnesses in court due to our expertise in this field. You can see the results of those cases as public record.

Maybe, and this is a real stretch, but maybe research could show that 60% is a reasonable average, but I’m not about to conduct that as I see it as a huge waste of time as it cannot be used by investors as a guide on a case by case basis.

 

I’m going to cap it at three BS numbers, lest this become mad tirade but do me a favour and call out this stuff when you see it. It’s lazy, tired, misleading and about time we started questioning some of the things we read.

What you need to know – Tax depreciation effective lives 2018/2019 – TR 2018/4

From the 1st of July 2018, new effective life rulings have been in affect that govern how plant and equipment assets are depreciated. The new ruling is TR 2018/4 and replaces TR 2017/2 (I don’t know how they come up with such whacky names).

If you happen to be in any of the following industries, new determinations apply;

  • butter manufacturing
  • fruit and vegetable processing
  • gas, oil and mining support services (excluding offshore services)
  • ice cream manufacturing
  • scientific testing and analysis services
  • spirit manufacturing.

The good news for residential property investors is that nothing has changed. You can see the current effective lives for all residential plant and equipment items here https://www.mcgqs.com.au/ato-effective-lives-2019-2020-depreciation-rates.php

If you’re interested in how effective lives are created, you can check out our article on that here.

Depreciable asset or repairs and maintenance? – How to make the call

Owning an investment property will invariably result in having to spend some money on it. The good news is that the tax man (perhaps we need a gender-neutral term but technically the tax commissioner is a man) will let you claim that expenditure as a deduction. However, not all deductions are equal.

Spending money on your investment property is likely to be classified as either a depreciable improvement or repairs and maintenance. Repairs and maintenance are by far the best outcome, as you’ll be able to claim 100% of the cost as an immediate deduction within the financial year the cost is incurred. So, why don’t we just say everything is repairs and maintenance? Well, there are very clear rules the ATO have provided, and breaching those will likely have you on the receiving end of Thor’s hammer (some say the ATO keep this in a filing cabinet, maybe check with four corners.)

Let’s get back on track, shall we? If you check out the ATOs website on repair and maintenance here: https://bit.ly/2TF6YMx, you’ll see find a video of a rather dapper looking bloke in a kitchen. To save you from that, here’s some definitions;

Repairs are:

  1. replacing part of the guttering or windows damaged in a storm
  2. replacing part of a fence damaged by a falling tree branch
  3. repairing electrical appliances or machinery.

Maintenance refers to:

Work to prevent deterioration or fix existing deterioration, such as;

  1. painting a rental property
  2. oiling, brushing or cleaning something that is otherwise in good working condition
  3. maintaining plumbing.

An improvement is work that:

  1. provides something new
  2. generally furthers the income-producing ability or expected life of the property
  3. generally changes the character of the item you have improved
  4. goes beyond just restoring the efficient functioning of the property.

So as per the above, repairs and maintenance are generally only things that maintain or repair an existing asset. The moment you replace something with something else, it becomes an improvement, even if the old asset was ruined or needed to be replaced. An improvement is most likely to be classified as division 43, which is the same as the structure of the building. This means you’re able to claim 2.5% of the value each year for 40 years. So, you get $2.50 back in deductions for every $100 of expenditure. Of course, it’s much better to be a repair as an instant deduction, rather than having to wait for 40 years to claim the whole value. Sadly though, the definitions are clear from the ATO but it’s always worth having the conversation with your accountant.

Remember though that even repairs and maintenance can’t be an instant deduction if “they did not relate directly to wear and tear or other damage occurring due to renting out your property.” The good news is though they can still be claimed as an improvement once the property becomes income producing.

Three Key Triggers Telling You To Get A Depreciation Schedule

Every year people complain about Easter eggs being in the shops already in February, it’s one of those perennial water cooler topics like the magpie swooping season. Tax time is no different and for my part, I wish I wasn’t droning on about the end of the financial year approaching every year, but my insatiable thirst for saving people money takes precedence.

The depreciation party isn’t over, but the game has changed. It wasn’t my idea to call it a party either, can you imagine it? Elbow pads, corduroy trousers and juice boxes as far as the eye can see. Anyway, I digress.

The changes have tightened the reins on depreciation, but our statistics are still showing there’s value in all but the rarer cases. I’m often asked how to categorically tell if it’s worthwhile having a depreciation schedule. The standard question is something along the lines of “Can we say for example, that if the property was built in the 60s it won’t be worthwhile?” The answer is no, you can’t. We’ll get to that in a moment.

Let’s start with a way you can all but guarantee that you need a depreciation schedule.

1. The property commenced construction after the 16th of September 1987

If the property was built after this date, it means that you’ll be able to claim depreciation deductions on the value of the original building structure. These deductions are referred to as division 43 if you want to get nerdy. It’s a key trigger because worst case scenario, the report is going to be paying for itself.

Let’s run some calculations. We’ve crunched the numbers from our database of landlords and found that the average build cost for a new investment property is $267,000. If we roughly index that back to say 1988 (because the cost to build back in 1988 was cheaper than today) you’re looking at a build cost of $102,000. Now some of that value would be plant and equipment, so we can conservatively knock off around $20,000 leaving us with $82,000 of qualifying division 43 building works. This will give you $2,050 worth of deductions each year until the year 2028, no matter when you bought the building.

2. The property has been extended, had a new kitchen and bathroom after the 16th of September 1987

Like the above, but based on the improvements, you’ll be able to claim 2.5% of the value of the new building works/renovations each year from the date of completion for 40 years, whether the works were done by the previous owner or yourself. Therefore, you cannot simply say that a property built in the 60s won’t be worthwhile. Regardless, people are given this dodgy advice daily. So, the original structure won’t qualify if built before the 1987 date, but the renovations will if after 1987 (structural things like paths & fences would need to be after 26th of February 1992). The trick now is knowing the rough value of the work being done. For every $100,000 worth of building renovations, you’re able to claim $2,500 of deductions each year. A quantity surveyor would need to estimate the value of these works if they were done by the previous owner, but anything over around $40,000 is likely to produce some worthwhile claims and most people can spot a spend of $40,000 on a kitchen and bathroom when they see it. If you’re not sure, ask a quantity surveyor.

3. You bought the property brand new

Sounds simple, stupid even right? However, we’re still doing depreciation schedules for people that bought new properties and waited too many years to have one done and will subsequently not be able to back claim far enough to capture everything. The trick now with the depreciation changes is that if you bought after the 9 th of May 2017, you’ll kill the plant and equipment deductions if you ever decide to move in (plant items are things like carpets, appliances, heaters and the like). Also, if you bought prior to the 2017 budget, the property needed to be a rental in the 2016/2017 financial year. This is exactly why my blood boils when people say that you’re simply grandfathered if you bought prior to the 9 th of May 2017. Not if you moved straight in and kept living in it that year you’re not!

I’ll wrap it up here owing to my indulgent introduction, but these are probably the simplest three triggers that point you in the direction of a depreciation schedule because it will save you money. There are plenty of odd cases and nuances, so an enquiry is always worth the cost of a bit of your time, but if you fall under any of these three categories, tax time might be a little more rewarding for you this year.

Join us here at MCG in celebrating International Women’s Day

Today, March 8th is international women’s day. I’d like to take a moment from talking about property, construction, depreciation and my normal blog topics to recognise some inspirational women. Here at MCG Quantity Surveyors, our office is thankfully around 50% women and the contribution they make is a marked one. They are critical to our business in a myriad of roles, and some of those roles are heavily male-dominated ones. Outside of what they ‘do,’ they’re witty, passionate, fun and our office wouldn’t be the same without them.

Personally, my life is richer for having my wife, mother, sister, mother-in-law, sisters-in-laws, friends and aunts in it. They’re the first to cheer in the good times and the first to console in the tough ones.

I’d like to honour them today by sharing six women whose stories inspire me. Three born in the 1800s or earlier, and three a tad more contemporary. They may not be feminists per se or have dedicated their lives to women’s rights, but for me, they exemplify the trailblazing spirit. In my view, they have made monumental inroads towards equality through leading inspirational lives.

 

Joan of Arc

She was a seventeen-year-old girl in a time where seventeen-year-old girls didn’t change worlds, but somehow, she did. Joan of Arc was born to simple farmers in the tiny village of Domremy. She managed to defeat a well-trained British Army and make herself a member of the royal court in just one year. She was a superb strategist and no doubt a born leader and sustained many injuries on the battlefield.

She was captured in May of 1430 and was burned at the stake for heresy in a show trial that only enhanced her reputation as a martyr and heroine. Her was later overturned by an ecclesiastical court in 1456 and in 1920 she was even canonized and made one of the five patron saints of France.

 

Marie Curie

Born Maria Skladowska in Warsaw, Poland on November 7, 1867, Marie Curie was a penniless student who worked as a governess and tutor while pursuing her dream of becoming a physicist, which was simply not an occupation that women held in the nineteenth century. After moving to Paris, she met a physics and chemistry instructor by the name of Pierre Curie, in whom she found a kindred spirit. The two married in 1895, becoming the first husband and wife science team in history, and set about on a short but spectacular career that would make them Nobel Prize-winning physicists and their names synonymous with the science of modern chemistry. What makes Madame Currie so remarkable—besides being the first woman to win a Nobel Prize in science, was that she continued to carry on with her husband’s work after his death in 1905 (likely as a result of their experiments with radiation), going on to become the first female head of Laboratory at the Sorbonne University in Paris and winning a second Nobel Prize, this one in Chemistry, in 1911 (which made her the first person to win two Nobel prizes—an accomplishment not to be repeated 1962. No doubt her accomplishments served as a source of inspiration for the thousands of women scientists and researchers who were to follow later.

 

Amelia Earhart

Amelia Mary Earhart was born on July 24, 1897, and was an American aviation pioneer and author. She was the first female aviator to fly solo across the Atlantic Ocean and she received the U.S. Distinguished Flying Cross for this accomplishment. She set many other records, wrote best-selling books about her flying experiences and was instrumental in the formation of The Ninety-Nines, an organization for female pilots. In 1935, Earhart became a visiting faculty member at Purdue University as an advisor to aeronautical engineering and a career counsellor to women students. She was also a member of the National Woman’s Party and an early supporter of the Equal Rights Amendment.

During an attempt to make a circumnavigational flight of the globe in 1937 in a Purdue-funded Lockheed Model 10-E Electra, Earhart disappeared over the central Pacific Ocean near Howland Island.

 

Rosa Parks

It doesn’t sound too taxing refusing to give up a seat on a bus, but when Rosa Parks did it in 1955 it was nothing short of unheard of. As an African American, Parks was legally obliged to give up her seat at the request of a white person – something she simply wasn’t willing to do. The courage she showed in that instance sparked the civil rights movement in America, and her simple act of defiance changed the lives of millions of people. “I’m tired of being treated like a second-class citizen” was the quote that Rosa Parks best used to describe the reasoning behind her act of defiance. The sheer bravery of this woman led to one act of defiance that changed the world for the better.

 

J. K. Rowling

Joanne Rowling was born on 31 July 1965, writing under the pen names J. K. Rowling and Robert Galbraith, is a British novelist, screenwriter, and producer who is best known for writing the Harry Potter fantasy series. The books have won multiple awards and sold more than 400 million copies. They have become the best-selling book series in history.

Rowling was working as a researcher and bilingual secretary for Amnesty International when she conceived the idea for the Harry Potter series while on a delayed train from Manchester to London in 1990. The seven-year period that followed saw the death of her mother, birth of her first child, divorce from her first husband and relative poverty until the first novel in the series, Harry Potter and the Philosopher’s Stone, was published in 1997.

Rowling has lived a “rags to riches” life story, in which she progressed from living on state benefits to being the world’s first billionaire author. However, she lost her billionaire status from giving away much of her earnings to charity. Time magazine named her as a runner-up for its 2007 Person of the Year, noting the social, moral, and political inspiration she has given her fans. In October 2010, Rowling was named the “Most Influential Woman in Britain” by leading magazine editors.

 

Malala Yousafzai

Malala Yousafzai is a Pakistani education advocate who, at the age of 17, became the youngest person to win the Nobel Peace Prize after surviving an assassination attempt by the Taliban. Born on July 12, 1997, Yousafzai became an advocate for girls’ education when she herself was still a child, which resulted in the Taliban issuing a death threat against her. On October 9, 2012, a gunman shot Malala when she was travelling home from school. She survived and has continued to speak out on the importance of education. In 2013, she gave a speech to the United Nations and published her first book, I Am Malala. In 2014, she won the Nobel Peace Prize.

The recent regulatory changes and the state of the Property Market

The January CoreLogic figures have shown that capital city dwelling values have posted their first quarterly fall since April 2016. The peak of the market was called as far back as 2016, but now we’re seeing the evidence some two years later. On a positive note, the combined regionals edged slightly higher over the Dec-17 quarter and there are clearly some strong investor opportunities outside the capital cities.

The quarterly capital city falls were led by Darwin at -2.9 percent and Sydney at -2.1 percent.

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It’s interesting to see Melbourne sitting neutral (0.9%) over the December quarter compared with Sydney, especially given Sydney lagged Melbourne’s price growth over the 2017 calendar year by 5.8 percent. However, even with Sydney dwelling values down 2.1% over the final quarter of 2017, they’re still 3.1% higher over the past year.

In good news for investors, the annual rate of rental growth is higher than a year ago across most capital cities, with a bit of weakness shown at the end of 2017. That being said, gross rental yields are starting to trend higher, with rental growth outpacing value growth in many cities.

The regulatory changes have had a huge impact on investors and interest-only loans have fallen off a cliff. It will be interesting to see how long APRA and the banks hold this stance, my guess is the banking royal commission will keep their appetite for investor lending to a minimum in the short term.

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How common property assets can supercharge your upfront deductions

Most investors would be aware that if you own a unit within a complex, you’ll have an entitlement to claim over the common property assets based on your share of ownership. This percentage share is commonly referred to as a unit entitlement and can be found on your strata plan or plan of subdivision. You’ll see an entitlement per lot and then an aggregate for the sum of all lots.
So, if your unit entitlement is 60 and the total of all lots is 800, then you’ll have a 7.5% claim on the common assets. Typically, within larger developments, your percentage claim is very small, but it can still contribute significantly to the claim based on the high values of common assets.

There are two main common property depreciation categories, the building structure and the plant assets.

Common area deductions can give your depreciation schedule a real kick in the pants, here’s why.

If we look at the building structure in isolation, the sheer construction value of these areas can lead to significant claims. Your specific unit may have a construction cost of say $200,000 or thereabouts, but the complex consisting of foyers, levels, basements, gyms, pools and the like could be in the tens of millions of dollars. Take for example a unit at 618 Lonsdale Street Melbourne. The construction value of one of the units we estimated to be around $1550,000 excluding plant, whereas the common areas came in at around 35 million. Based on the typical unit entitlement within this development, around $73,000 worth of common property building areas are directly attributable to each investor.

However, the real kick for the upfront deductions can be found in the plant and equipment assets. Thanks to ScoMo, our esteemed federal treasurer, these plant deductions are now only available to brand new units. Out of interest, at MCG 38.3% of our residential reports are on brand new houses or units.

Looking again at 618 Lonsdale Street, we found 35 separate plant and equipment categories. These include things like lifts, carpets, fire detection alarms, ventilation fans and the like. We found almost a million dollars’ worth of common property air conditioning plant but based on an individual unit entitlement, this gave a total of $1,903 to the investor as a deduction depreciating over 15 odd years. Air conditioning is one of those typically high-value assets within a large residential complex, and it’s not typically something that provides a high upfront deduction. The good news is that most things do. Of the 35 separate categories, 25 of them provided 100% of their depreciable value to the investor in year one.

Why? Well, assets that have an opening value of less than $301 that are not part of a set, can be written off at 100% right away. So even though there might have been over $35,000 worth of door closers for example, the individual investors share came to $150 in total. Door closers are one example of an instantly deductible asset but typically we also see things like gate motors, barbeque assets, fire alarm bells, fire extinguishers, gym assets like treadmills, pumps, proximity readers, swimming pool filters and more. Looking at the Lonsdale street case study, we uncovered $2,223 worth of instant deductions on these common property assets.

Common property is certainly the reason why units provide better deductions than houses in general, but it’s also interesting to analyse the way those deductions fall into the schedule. For a long list of items, those deductions will hit within the first year of ownership, which can provide a significant cash flow advantage to the investor.