New vs old properties, and what is depreciation

New vs Old – What Are the Pros and Cons When Investing & What is Depreciation

Prefer reading? Here is a transcript of the video!

New vs old it’s a question we’re often asked from our customers when purchasing investment properties, so I thought, why not do a video on the pros and cons of both!

If you’re new to the channel? My name’s Ryan Pappas and I’m a mortgage broker in Sydney. The debate on new vs old is a hot topic, so I thought I would share my views on the benefits to new and the cons to established and vice versa. Now, just a disclaimer. I’m not a tax professional, I’m not an investment specialist, so I’d recommend you obtain some independent advice or contact us and we can put you in contact with the professionals in that field.

What are the pros of buying a new property vs the cons of an established property?

  1. Well, depreciation with new properties you may be able to offset both the building depreciation and the fixtures and finishes on your yearly tax return. With old properties, depreciation of the building is allowable. However, this is based on the original build cost, perhaps 10-15 years ago, meaning you may be towards the end of the cycle due to the age of the property.
  2. Another pro for new properties is yield or rental income. Most new properties appeal to tenants, often resulting in a stronger rental income than the comparable established property down the road.
  3. Another pro for new properties is choice. Whether you are buying a unit, a house and land package, or anything in between, with new properties you typically have a greater choice. For example, if a developer markets ten house and land packages, you generally have access to all ten vs old, you’re typically left with what’s left on the market.
  4. And lastly, another big pro is maintenance. New properties come with less maintenance than old properties.

What are the pros of an established property and the cons of buying new?

  1. With new properties, you are typically buying something off plan with an extended settlement. So if the market changes in the subsequent years, you may be caught out and with established it’s ready to purchase now.
  2. Secondly, not knowing what you are purchasing when purchasing new properties, you are often buying off some drawings that an architect completed. With established you can see it.
  3. Thirdly, you are typically paying a premium for a new property versus an established property.
  4. And lastly, history with an established property you know the history of the property versus new. You need to do your own research on the developer and see their previous works.

What is Depreciation in Property?

Now the question you’re probably asking yourself is Ryan, what is depreciation in property?

The dictionary meaning of depreciation is something that diminishes in value over a period of time, like when you buy a new car off a showroom, it loses value. It is the same with property. The fixtures and finishes devalue, the buildings devalue due to age.

The ATO allows you to claim this depreciation as a tax benefit when you complete your yearly tax return.

What are the types of Depreciation in Property?

Now what are the types of depreciation? There are two types of depreciation

  1. Division 40 or fixtures and finishes
  2. Division 43 or building costs.

Division 40 is plant and equipment or fixtures and finishes for ease, like your dishwasher, carpets, light fittings, each item has its own lifespan, measured in years set out by the ATO. In 2017, there were some changes to this form of tax deduction that basically if you purchase a new property, you can claim this deduction. However, if it is an established property, you can no longer claim this deduction. We suggest speaking with a depreciation specialist for more information on this.

So what is division 43? Division 43 is your capital works, deductions or building costs like your driveways, garage, painting. Properties built after the 15 September 1987 are eligible to claim building costs over 40 years at 2.5% per annum.

As mentioned before, please do reach out to a professional in this field or contact us  so we can give you a recommendation.

Now that’s all from me and I hope you found this information helpful. Please do share your opinion on the benefits to new the cons of established and vice versa. We look forward to talking to you soon and please do reach out to us if you have any scenarios, questions or anything else you want us to cover. Look forward to talking to you soon!