Add value and increase deductions with an alfresco area

Image result for alfrescoClaim depreciation on outdoor structures and save

Australia is made for outdoor living, so it is little wonder that alfresco areas have become sought after additions in any property.

Owners see great value in adding permanent weatherproof structures to an investment property. Creating an indoor-outdoor environment which can be enjoyed all year round not only adds value to the existing property, but it can also help to attract potential tenants and potentially increase the annual rental yield.

What many investors don’t realise is that by adding an alfresco or an outdoor structure of any kind, they will also impact the depreciation deductions they can claim.

Any structures added to an investment property will entitle the owner to claim additional capital works deductions, also known as building write-off, at a rate of 2.5% per year.

If the owner installs any new plant and equipment items, including removable or mechanical assets, this will also entitle the owner to claim depreciation deductions for these items. The deductions an owner can claim for any new plant and equipment items will be based on the individual effective life of each item as set by the Australian Taxation Office.

Let’s take a look at a scenario in which an investor decided to add a seven metre by four metre outdoor alfresco to their existing four bedroom investment property. The structural work on the alfresco cost $15,010. The owner also chose to install plant and equipment assets totalling $9,217 in value, bringing the total cost of work done to the property to $24,227.

Below is a summary of the costs of the new additions and the first full year depreciation deductions the owner could claim.

al fresco depreciation items

As the table shows, the owner of this property could claim $375 in capital works in the first full financial year deductions for structural items such as the concrete slab, walls, tiles, roof and lattice screening. The owner of the property would also be entitled to claim capital works for the remaining life of the property (forty years) for new structural items.

Plant and equipment assets installed such as an outdoor ceiling fan, outdoor furniture, a freestanding BBQ, light shades and garden solar lights resulted in a $3,831 deduction in the first full financial year for the property owner. This brought the total depreciation deduction of new items installed to $4,206 for the owner. These deductions would be in addition to any remaining depreciation deductions the owner could claim from the pre-existing property.

It is important to note, that if the property owner was to remove any existing structures or assets during the process of adding the alfresco area, they may also be entitled to additional deductions. If any remaining depreciation deductions exist for items or assets being removed during a renovation or addition, the property owner may be entitled to claim a deduction for the full amount of the remaining depreciation for items scrapped within the financial year of their removal.

Property owners should always seek the advice of a specialist Quantity Surveyor when they plan to make any alterations to their rental property. If the owner has an existing depreciation schedule, the owner will need to have it updated, and if assets or structures are being removed, the Quantity Surveyor should perform a site inspection before and after work commences to ascertain the remaining depreciation of items being removed and value new structures and items added to update the depreciation schedule for the owner.

Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.

We already own two separate properties. Should we keep them, or sell and combine assets?

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Sometimes, couples enter a relationship each owning a property already. These properties might be rented investments or their principal place of residence.

Either way, when moving in together, there’s plenty to think about with your future real estate strategy. You have the option to…

  • Sell both properties, combine assets and buy something bigger or in a better location
  • Keep both properties, rent them out, and use the income to increase your borrowing capacity
  • Sell one property, keep the other, and use the equity from the one you sell to improve the one you keep
  • We suggest you get up-to-date appraisals on both properties and then consider which is best to keep, or whether both should be disposed of

Talk over your hopes, dreams and aspirations. Then, when you’re both on the same page, talk to real estate agents and your financial advisor to help plan a strategy.

What happens when your landlord decides to sell?

What happens when your landlord decides to sellWhen the owner of your rental property decides to sell, communication between you and you property manager becomes paramount.

The first and most important piece of advice is don’t panic.

The sale of a landlord’s investment property doesn’t necessarily mean you will have to move.

In fact, well-presented properties with a tenant and lease in place are usually more appealing to investors than homebuyers, so the chances are high that a new investor will buy the property and nothing will change from your perspective.

The first and most important thing is to cooperate with your property manager about access arrangements concerning inspections and photography.

Next, you might even like to talk to your property manager about advice on how you could buy the property. Many landlords jump at the opportunity to discuss a sale to a tenant.

Signing a new lease also improves investor appeal so you can ask about that too.

How do millennials feel about climbing the property ladder?

How do millennials feel about climbing the property ladder? Generation Y, also known as millennials, are the group of people born between 1980 and the early 2000s. As is often the case with generational groups, millennials have their own set of values and ambitions that differentiate them from their predecessors.

These values frame their world view and influence a range of their financial decisions, running the gamut from travel to buying real estate, and especially their first home. So, how do millennials feel about investing in property and potentially beginning a portfolio by climbing the property ladder?

Enthusiastic

The Domain Consumer Insights Study found that, contrary to popular belief, the average age at which a millennial becomes an investment property owner is 25. This is in stark contrast to baby boomers, who purchased their first home nearly two decades after the age of 25.

“The idea of buying an investment property and renting at the same time is now much more commonly accepted, whereas probably 10, 20 years ago you bought your house to have your family in,” explained Jennifer Duke, editor of the Domain Review.

Moreover, the number of millennials who buy multiple properties is on par with older generations. According to the study, 17 per cent of millennials own two or more properties. All of this research implies that millennials are getting on the first rungs of the property ladder fairly early. However, it’s important to note that 26 per cent of millennials don’t fall under this category – they are still living in their parental home.

Apprehensive

While some millennials are embracing purchasing property, there are still a fair amount who have some anxiety regarding the subject. A report compiled by BDO and Co-Op surveyed 18-29 year olds and found that 87 per cent think their generation will never own a home outright.

Yet, 72 per cent of them feel that it’s important to buy a house as soon as they can. In light of this, a whopping 93 per cent of millennials have money saved, according to the report’s findings. This also shows that this group is savvy with savings, with over 65 per cent of them committed to long-term savings goals. This approach has resulted in an average savings per person of more than AU$8,000 or more.

These positive habits might be contributing to why so many of them are in fact ascending the property ladder at fairly young ages.

What are the latest green trends in housing?

What are the latest green trends in housing?As going green and adopting sustainable development methods are increasingly becoming popular in the real estate and housing construction sectors, several trends are emerging. Here we take a look at what these trends are, and what they mean for the real estate sector  across the country.

Australia and green building goals

In Australia, the Climate Change Authority has set an emissions reduction target of 15 per cent below the levels of the year 2000, to be achieved by 2020. Looking ahead to 2030, this target increases to between 40 and 60 per cent below 2000 levels.

Despite these goals, renewable energy sources aren’t being used as often as they should. Indeed, a recent Energy White Paper produced by the Department of Industry and Science found that only 6 per cent of the total energy consumption over 2012-2013 was generated from renewable sources.

While there is room for things to improve, the biggest positive is that Australians are wanting a greener future for their homes.

Trends in green housing

A whopping 87 per cent of people living in Australia would like solar panels installed on their homes, according to a report by independent market research company Ipsos.

In addition, geothermal energy is also a fairly popular choice, with 45 per cent of people interested in using the heat from below the Earth’s crust to supply warm water to their homes. Geo-exchange pumps are increasingly being used in housing construction, built under the house to transfer the natural heat from underground to the water inside the pipes before residents can shower or wash dishes.

“The results show Australians strongly support renewable energy and demonstrate the importance of involving and consulting locals,” stated Australian Renewable Energy Agency CEO Ivor Frischknecht.

Impact on buying real estate

It can prove to be fruitful to keep these trends in mind when planning to buy real estate. With more and more people attracted to green energy when buying real estate, both agents and buyers can keep note of the value of a home if it comes with environmentally friendly features.

For first home buyers, investing in a green home might at first glance feel like an extra expenditure or outside the budget, but it may in fact end up costing you less in the long term. For instance, a study published in the International Journal of Global Energy Issues found that solar water heating can pay for itself five times over, making it a sensible investment.

Why not invest in a home with solar friendly features already included and reap the benefits for years to come?

Six capital gains and depreciation facts for property investors

One question investors often ask about claiming depreciation on a rental property is ‘how will these claims affect Capital Gains Tax (CGT) when the property is sold?’

CGT can be a complex topic for investors to understand, particularly as the answer to the above question can really depend on the scenario of the individual property investor.

Introduced on the 20th of September 1985, CGT is basically the tax payable on the difference between what it cost you to purchase an asset and the amount you received when you disposed of it. In the case of an investment property, this is the difference between the original purchase price of the property including any capital buying costs and the price the property is sold for plus any selling costs. When you sell an asset such as a property, this triggers what is called a ‘CGT event’ and the owner will either make a capital gain or loss on the property.

When an investor has been claiming property depreciation, the cost base could be altered, therefore changing the capital gain or loss. To help explain the implications of property depreciation on CGT, here are six facts investors should be aware of.

1.    What is property depreciation?

Property depreciation is the wear and tear of a building and the plant and equipment items within it. The Australian Taxation Office (ATO) allows owners of income producing properties to claim this depreciation as a deduction in their annual tax return, meaning they pay less tax. Property depreciation is made up of two main parts; capital works deductions and plant and equipment depreciation.

2.    How do capital works deductions affect CGT?

Capital works deductions are available for the wear and tear on the structure of the building. Examples of items which can be claimed include bricks, walls, floors, roofs, windows, tiles and electrical cabling. The capital works deductions will reduce the cost base of the property which will add to the capital gain and therefore increase the amount of CGT applicable for the owner of the property.

3.    How does plant and equipment depreciation affect CGT?

Depreciation deductions can be claimed for the mechanical and easily removable plant and equipment assets contained within an investment property. When a property is sold, a gain or loss is calculated separately on these items. This is because often these assets will have been updated, removed or replaced over time. This means that the original assets contained in a property at the time of purchase can be very different to the assets contained in the property at the time of sale.

If an investor were to increase the value of plant and equipment during the time the property is owned (for example by replacing the carpets or completing a renovation) this could increase the cost base of these assets and may therefore reduce the CGT when the owner sells the property. If the value of assets in the property when sold is less than when purchased the cost base will be reduced, therefore increasing the amount of CGT.

4.    What CGT exemptions apply for a principal place of residence?

Properties which are owned by someone who resides, occupies or lives in the property as their home are exempt from CGT so long as the dwelling is used mainly for residential accommodation and is located on land under two hectares in size.

If the owner of a primary place of residence chooses to move out of their home and rent it out, a CGT exemption is available for up to six years after they have moved out so long as they don’t own another primary place of residence.

If the owner moves back into their investment property, then moves out and rents the property again, a new six year period will commence from the time they last moved out of the property. There is currently no limit to the number of times a property owner can do this so long as each absence is less than six years.

Only one property can be classed as a primary place of residence and therefore exempt from CGT at any one time with the exception of the following rules which apply if both properties are treated as the owner’s primary place of residence within a six month period:

  • The old property was the owner’s primary place of residence for a continuous period of at least three months in the twelve months before they sold it
  • An owner did not use the property to provide an assessable income in any part of the twelve months when it was not their primary place of residence
  • The new property becomes the property owner’s primary place of residence

5.    Are property investor’s eligible for a discount?

A 50% exemption on CGT is available to individuals or small business owners who hold an investment property for more than twelve months from the signing date of the contract before selling the property.

6.    Is it still worthwhile claiming property depreciation if it will later add to the capital gain?

The short answer is yes. During the term of ownership, capital works and plant and equipment can be claimed as a deduction at the investor’s marginal tax rate. These deductions will reduce tax liabilities, therefore generating additional cash flow for the investor each year.

When a property is sold, if the owner has held the property in their name for more than twelve months, the owner will be eligible for the 50% exemption. This means that only 50% of the capital works deductions during ownership will carry through to the ‘CGT event’, making it far better for a property investor to claim the capital works deductions and take advantage of the additional cash flow during ownership. Depreciation claims also provide an opportunity for the property owner to invest further or reduce loan liabilities.

When considering selling an investment property, it is recommended that investor’s seek advice from their Accountant about the implications of CGT and the exemptions available. A specialist Quantity Surveyor can also provide advice on the depreciation deductions for any investment property.

For more information on property depreciation, visit the BMT Tax Depreciation frequently asked questions webpage by clicking here or alternatively, speak with one of their expert staff on
1300 728 726.

Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.

How does construction support affordability?

How does construction support affordability?It’s hard to ignore the rapid rate at which homes have been popping up around the country. Construction has been a bright spot in real estate in Australia for some time, with a steady stream of properties helping to support confidence, jobs and keep the economic wheels spinning. Not only that, but it creates opportunities to buy a house.

This impressive activity is showing little sign of slowing down, either, as new figures from the Australian Bureau of Statistics (ABS) show strong growth during May. According to the latest building approval data, the total number of new dwellings approved for construction increased 2.4 per cent during May in seasonally-adjusted terms.

In fact, there has been a 17.6 per cent rise over the 12 months to May. The Property Council of Australia pointed out that this is an encouraging sign for affordability, particularly for real estate in Sydney.

Executive Director Residential Mr Proud noted there were 70,000 more approvals in the past year than in the 12-month period to May 2012, with New South Wales in particular showing strong improvement. Some 57,088 new dwellings were approved in seasonally adjusted terms in NSW for the 12 months to May 2015, a 10 per cent rise on the same period to May 2014. This could represent an important step forward for reducing housing deficits and counteracting rapid price growth.

“The only meaningful way to take the pressure off prices is to increase new housing supply,” Mr Proud said.

Strong growth in multi-unit properties

Construction activity has been especially strong in the apartment segment. Master Builders Australia said multi-unit approvals posted an all-time record in May, with 7,300 dwellings in buildings of four storeys or more approved over the period. While this means multi-unit homes for sale may be more accessible when completed, detached houses still face supply pressures.

Master Builders Chief Economist Peter Jones said policy restrictions on releasing greenfield land may be holding the industry back. This point was echoed by the Housing Industry Association (HIA), which highlighted a 15.1 per cent increase in multi-unit approvals during May. However, approvals for freestanding homes dropped 8.5 per cent over the month.

HIA Senior Economist Shane Garrett said this means policy makers need to do more work to ensure a steady supply of both affordable apartments and houses for sale.

“They must rectify the bottlenecks in the planning system, redress the excessive fees and charges on new residential developments and ensure that the pipeline of residential land will meet the ongoing community demand for new homes,” he concluded.

With such a solid supply of properties in the pipeline, maintaining this level can support affordable and help households buy a home in Australia.

Landlords blind to the benefits of pets

Landlords blind to the benefits of petsFirst National Real Estate chief executive Ray Ellis says that with record low rental yields nationally, property investors should open their eyes to the benefits of renting their investment properties to tenants with pets that have good references.

‘Capital growth has far outpaced rental growth nationally and this has forced yields to record lows. Yet many investors refuse to consider applications from tenants with pets, despite research that shows some are willing to pay slightly more rent and that they tend to stay longer’ said Mr Ellis.

‘The reality is that when landlords agree to flag their rental property as Pet Friendly with First National Real Estate, the chances of getting their vacant property leased quickly grows exponentially’.

The Petcare Information Advisory Service (PIAS) indicates 66 per cent of Australian families have pets so the majority of our 23.13 million population values pet ownership. Yet just 2.1 million families or 9 per cent of the population are able to rent properties with their pet.

The challenge of finding rental properties where landlords will consider pets leads to some 65,000 pets being surrendered to the RSPCA on an annual basis. Unfortunately only some 22 per cent of animals surrendered are able to be re-homed.

‘Because tenants understand how difficult it can be to rent a property with their pet, many are prepared to discuss the amount of rent they’ll pay. They often have references from previous real estate agents and landlords that make their application more attractive’ said Mr Ellis.

‘Our Property Managers can take additional steps to protect a landlord’s interests such as adding specific clauses to the lease, requiring annual steam cleaning of carpets, and in some states, negotiating a pet bond. Good tenants understand these are realistic trade-offs that help their landlord to feel more confident about their intentions’.

On any given day, about 5.7 per cent of First National Real Estate’s vacant rental properties are available through the network’s Pet Friendly Rental Search feature, with the most Pet Friendly states being Queensland and Tasmania – equally offering 12.5 per cent of vacancies as Pet Friendly. The network assisted Dr Emma Power’s University of Western Sydney 2013 research – Renting with Pets in Sydney – and has cooperated with the PIAS in the creation of educational booklets and the promotion of socially responsible pet ownership. It encourages landlords to discuss their concerns with Property Managers and weigh the merits of all applications.

What are our alternatives to stamp duty?

What are our alternatives to stamp duty?If you were looking for one controversy that has excited debate in the property market over the past few months, it’s stamp duty. The contentious tax has been brought into discussions about housing supply, affordability – even the recent debate on foreign investment has touched on the role of this tax. Fortunately for those buying a house or land for sale, it looks like the writing could be on the wall for this lucrative levy.

In an address in Melbourne, Treasurer Joe Hockey made his position clear on tax reform, pointing out that state and territory governments need to look elsewhere for sources of income. He highlighted that it is one the nation’s most inefficient and inequitable taxes, and set the challenge to develop another way of raising revenue.

Finding an alternative

If you were looking for a little perspective on why stamp duty has become the hot topic, new research from the Housing Industry Association (HIA) should provide it.

The HIA’s winter 2015 edition of the Stamp Duty Watch report shows that the typical stamp duty bill on buying a house now amounts to over $20,000 on real estate in Cairns, Melbourne and Sydney, and has increased significantly in both NSW and Victoria over the past year or so.

“Independent research conducted for HIA last year provided compelling evidence of the benefits to Australian living standards and economic growth from the replacement of stamp duty with more efficient, broad-based revenue raising measures,” said Shane Garrett, economist at the HIA.

GST in, stamp duty out

The Property Council of Australia has also pointed out that while governments need to focus on substituting the levy, it needs to go hand in hand with a range of tax changes. In particular, Chief Executive Ken Morrison pointed out the GST reforms should be on the table.

In fact, a new Property Council survey uncovered strong support for increasing GST and abolishing stamp duty, which could indicate the direction that governments will go in the future. Around three quarters of those surveyed believed it was inevitable that GST will rise over the next 10 years, and over two thirds of people supported stamp duty being removed.

“Some 65 per cent of respondents believed the GST to be fair or very fair, and only 35 per cent as unfair, with most citing its benefit as a tax that cannot be dodged,” Mr Morrison said.

With public support firmly behind the abolition of stamp duty, only time will tell whether governments take this on board. If they do, those buying real estate in Australia are sure to reap the rewards.

Lending for real estate improves

Lending for real estate improvesInvestors have taken an increasingly active role in the Australian real estate scene, but it looks as though owner-occupied finance is on the road to recovery. Finding the balance between the two hasn’t been easy, but recently released figures from the Australian Bureau of Statistics (ABS) could indicate that the market is tilting back into alignment.

It’s hard to argue that investment hasn’t been rampant of late. CoreLogic RP Data analysis has revealed that investors commitments were worth $12.9 billion in March, a staggering 105 per cent increase in a little under four years. The Reserve Bank and regulators have been trying to get a handle on the insatiable demand for homes for sale, but ABS housing finance data suggests a change could be on the horizon.

Construction takes the cake

The total value of lending for property climbed 2.9 per cent during April in seasonally-adjusted terms, according to the ABS. Owner-occupied housing experienced a sizeable jump, rising 3.1 per cent over the month. Meanwhile, lending for investment homes rose a slightly slower 2.6 per cent.

Even more encouraging for the property market, the number of loans taken out for new home construction increased over the same period. There were 4.3 per cent more of these commitments recorded, as well as a 1.6 per cent jump in the number of loans for purchasing a newly construction property – a promising figure that Master Builders Australia has welcomed enthusiastically.

Chief Economist Peter Jones said this data could show that new home building is taking the lead in the finance department, which is encouraging for the supply of affordable real estate in Australia.

“The latest housing finance figures for April shows a welcome turnaround away from the focus on investment toward finance for the construction of houses,” Mr Jones said.

“The industry is looking to the non-investor sector to strengthen over the next 12 months to ensure that this rebalancing takes hold.”

What about first home buyers?

What’s more, the Housing Industry Association (HIA) hinted that first time buyers are becoming more active in the property market. ABS figures show that the number of loans for freshly-minted buyers as a proportion of all dwelling commitments rose to 15.2 per cent in April, up from 15.1 per cent in the previous month.

This might not seem like a big difference, but HIA Chief Economist Dr Harley Dale said it is the highest level seen in a year. It’s another encouraging factor for the property market, as it could indicate that these buyers are becoming a bit more confident in their pursuit of home ownership. In fact, Dr Dale suggested that the percentage figure could be higher if it were to include those first time buyers who get their start in the investment market.

If the popularity of housing finance for construction persists, the mix of property for sale can continue to expand – and young buyers may find themselves in a good position to look for houses for sale in the coming months.