(03) 9020 2905WHOA! Stop! Let’s start by running a demarcation line through this property argument.
Homes and investment properties require ideologically different decision-making processes.
A home is where you live. It fills emotional needs, such as proximity to family, friends, schools or a lifestyle. Homes should make you feel safe and happy.
I roughly agree with Justine’s (left) case for considerations for purchasing homes.
But the “old versus new” debate is different for investors. It’s based around the following property law, which is also tax law: “Land appreciates. Buildings depreciate”.
Unlike homes, investment properties are purely about making money. You’re not intending to live there, so all you need to consider is how do I maximise my returns – rent and capital growth – from this investment?
And with investments, old versus new has a different importance, because an rental property is tax deductible.
For properties built after 1987 (there are several tax dates, but we’ll use 1987), the buildings – bricks and mortar, roofs, garages, etc – themselves can be depreciated at 2.5 per cent a year for 40 years after construction.
What does that mean? Simplistically, take a one-year-old house worth $500,000. The land is worth $250,000, the buildings $180,000 and the “fixtures and fittings” (also depreciable) $70,000.
The building cost becomes a $4500 ($180,000 times 2.5 per cent) annual tax deduction for the next 39 years – a return of up $2092 a year.
It’s a tax deduction, cash-flow, thing for newer properties. But tax deductions should never be your only consideration. Quality overall property should be one, two and three.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and principal adviser with Castellan Financial Consulting.