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The Budget 2017 and Tax Depreciation for Property Investors

With the release of the 2017 Budget, there has been some noted changes that will affect property investors, the first one is the removal of claiming travel expenses to visit your investment property. This may not worry a lot of investors if their properties are located in the same city and you occasionally visit your property. The biggest saving to the governemnt will be from investors that have investment properties in other states and fly to see their properties or maybe book accomodation when there. This will no longer be claimable as a deduction. The other change and this the most worrisome one is the limiting of deductions for plant and equipment to the current investor.

From the Budget 2017 website

  • Better target plant and equipment depreciation deductions to those expenses actually incurred by investors.

This is the only detail available at the moment and the apparent savings to the Goverment over the next few years is $260 Million, this doesnt sound like a lot as the amount of depreciation claimable from existing plant and equipment far exceeds this amount. A typical property would have between $6000 to $10,000 of existing plant and equipment and if you multiply this by how many investment houses are sold every year then the $260 million falls way short. We will just have to wait and see when the details are released!

Tax Depreciation and Dual Key Properties

Dual key properties seem to be a new and popular investment house design that have increased in popularity. They are also a cost effective way to increase your rental yield and maximise tax deductions that you can claim every year.

Why are they a better option ? 1. You are effectively paying around $50,000-$60,000 for an extra one bedroom unit that can be rented out for more than $200.00 a week, thats more than a 20 % return on funds. 2. You almost have two items of plant and equipment in each house, ie 2 ovens, 2 cooktops etc, so you can claim back more on tax depreciation every year, some of these homes have an extra $9000 to $10,000 of plant that you can claim on.

Want a quote ? contact us on 1300 884 215

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Motel and Hotel Tax Depreciation

Motel and Hotel Tax Depreciation

Owning a Motel or Hotel can be very profitable but hard work, a good way to increase your profit and cash flow is to employ a Quantity Surveyor to prepare a Tax Depreciation Schedule for your business.  Motels and Hotels are usually sold as a business with a lease attached, ie a leasehold business or as a freehold going concern, you buy the buildings and the business.

Leasehold for a Motel or Hotel is where you take over the running of the business and pay the owner of the building a lease or rent per year.  When purchasing the business it will come with an asset register or inventory list of what is owned by the business, ie furniture, air conditioners, fridges, cutlery etc. If you purchase a larger Motel or Hotel then it might come with a commercial kitchen, bar or restaurant, in this scenario you will most likely as part of the business sale be owning all of the commercial kitchen appliances, ie ovens, grills, dishwashers  etc.

Generally you are buying the fitout of the business and all the structural walls, roofing or the shell of the building is owned the landlord. Who repairs or redecorates the Motel / Hotel? it is generally the new business owner and not the landlord, remember you are buying the business and that includes all of your fixtures and fittings but also keeping the buildings in a well repaired and tidy state, some leases will have a clause that states that you must redecorate the buildings every 5 years which includes painting, even maintaining and landscaping the land. The hot water system breaks down or needs repair?  Don’t be surprised that the landlord won’t fix this and is considered part of running your business and you will need to fix this yourself.

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So why is owning a leasehold Motel or Hotel a good business idea?

  • You don’t need the huge capital outlay of needing to buy the land and buildings on top of the business. You need less money and you can get a good return on your investment straight away.
  • Most people are buying themselves a well-paying job, you don’t have to work for someone else, you are the boss, in most situations, couples buy the business and run it themselves.
  • You can live on site, most Motels / Hotels will have its own manager’s accommodation and you cut down your cost of living by staying on site.

 

Can you claim tax depreciation on a leasehold Motel or Hotel?

Yes, you can and it will be a lot of money, as discussed above, you own all of the fitout, furniture etc

You will most likely have to keep the buildings in a good condition, you paint or redecorate the units, these are your costs to claim back. What about previous owner’s renovations? Yes, as part of your consideration price to buy the business, this includes works by previous owners, you still have to maintain and repairs these works so why not claim for them? As a Quantity Surveyor specialising in Motels and Hotels, this is what we do every time we inspect properties to maximise how much you can claim back in you tax schedules.

Motels and Hotels have to be kept in good condition and are generally renovated or refreshed quite regularly and in the eyes of the ATO capital works and plant and equipment have a much shorter lifespan, why is this good ? Well you can claim back depreciation a lot faster and get more benefit out of your returns.

Capital works deduction for short term accommodation is 4.0 % per year or 25 years maximum. Compare this to a normal house or unit which is 2.5% a year or 40 years maximum. What about the plant and equipment?  This is accelerated also, ie carpet is 7 years as opposed to 10 years for a normal house or unit.

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Some examples of leasehold motel depreciation.

 

  • A 20 year old Motel with 30 rooms, commercial kitchen, restaurant and bar, purchased for $1.4 million leasehold. Depreciation found to be claimable was $75,000 per year for the first 5 years with $750,000 remaining to be claimed over the full 25 years.
  • A 40 year old Motel with 10 rooms, purchased for $400,000, recently renovated. Depreciation found to be claimable was $35,000 per year for the first 5 years with $320,000 remaining to be claimed over the full 25 years.
  • A 16 year old Motel with 40 rooms, commercial kitchen, bar, restaurant, spa, purchased for $1,250,000. Depreciation found to be claimable was $120,000 for the first 5 years with $1,100,000.00 remaining to be claimed over the full 25 years.

 

Motel and Hotels that are freehold / going concern

With a freehold going concern motel or hotel, you are buying the land and buildings plus the business. The advantages of this is the increased depreciation that you can claim, you can now claim the structural part of the buildings and improvements.

 

Other advantages

  • You can buy a run-down business, improve it to a certain level and sell the business with a new lease.
  • As you own the buildings and land, potential for redevelopment is greater, you can also have capital growth in the long term due to raising land prices. If you own the leasehold, you don’t get this benefit.
  • As a freehold owner, the tenant will be repairing and looking after your investment, the only thing that you will need to fix is major defects which are not likely.
  • Disadvantage – you cant claim the accommodation internal fit-out if you sell and lease it to someone else.

 

 

 

Budget Tax Depreciation are now a registered Tax Agent

Did you know that all companies providing a Tax Depreciation Schedule service have to be a registered Tax Agent?

What does this mean?

Well from the 1st of March 2010, the Tax Practitioners Board, widened their scope of what constituted

“providing a Tax Agent Service” which included, Quantity Surveyors producing Tax Depreciation Schedules. The new legislation was created to ensure a high level of qualifications, professionalism and the neccesary experience to act as a Tax Agent.

Budget Tax Depreciation is pleased to annouce that they are a Registered Tax Agent and have the highest level of skills and professionalism, as endorsed by the Tax Practitioners Board

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How much depreciation can I claim on a new house ?

Have you always wondered how much depreciation or tax deductions you could claim back ?

It really depends on the type of house, location, size etc but it is always based on the construction cost to build, you cannot claim on land, developers profit, demolition or bulk excavation . If its a new house in a new subdivision and you got a builder to build for you, then this is a simple calculation by just looking at the Builders contract and the scope of works, its best to get a Quantity Surveyor to do this as they have the necessary skills and knowledge. A typical example would be a house that we have just recently done a tax depreciation schedule for in Springfield Lakes. Springfield Lakes is a popular new area with lots of new housing being built, the property that we inspected was a typical 4 bedroom single storey house, 190 m2 area on a small sloping site . The total amount of the contract works that was deductible came to $260,000, based on a first full financial year the owner was able claim back.

Year 1 $8,835.00
Year 2 $8,382.00
Year 3 $7.580.00
Year 4 $7,313.00

This was based on the diminishing value method which is an accelerated method of depreciation, it doesn’t mean you get more deductions, just more upfront in the first few years. So in year one the investor was able to off-set close to $9000.00 of legitimate tax deductions, the good thing about this is its a “non cash deduction” the owner never paid out any of his own money ! an extra $9000.00 can make the difference of the property being cash flow positive or not !

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Brisbane housing has boomed in the last 10 years

Brisbane is the place to be, but people aren’t living where you may think, new population figures from the Australian Bureau of Statistics reveal.

The data, which captures a decade of change to 2011, reveals the Greater Brisbane Region, which excludes the Gold and Sunshine coasts, increased by 25 per cent (432,300 people) and was just behind Greater Perth (26 per cent) as the second-fastest growing capital city in Australia.

The region (2,146,577) now accounts for nearly half of the state’s population (4,474,098), while the Brisbane Local Government Area is home to 1,089,743 people, or 21.5 per cent more people than in 2001.

But much of change fulling the greater Brisbane region expansion was recorded outside the Brisbane City Council limits, with the largest regional population growth recorded at Springfield Lakes in Ipswich City, and at the Moreton Bay Regional Council areas of North Lakes, Mango Hill and Cashmere. The estimated residential population at Springfield Lakes went from zero to 10,600 people between 2001 and 2011, with North Lakes and Mango Hill growing by 17,100, and Cashmere boosted by an extra 9200 residents.

Read more: http://www.brisbanetimes.com.au/queensland/brisbane-booming-in-the-middle-and-round-the-edges-20120801-23fd6.html#ixzz22LFxetVQ

 

Property Developing 101

For property developers during the halcyon days before the Global Financial Crisis it was easy to make money, everything they touched turned to gold . However post GFC it is a lot more harder to make money and you have to be extremely careful how you go about it . Developers building speculative houses, ”houses that you build, speculating that they will sell, as opposed to building specifically for a new home owner, ie a contract ” . These can be tricky to build as it is very dependent on market conditions, however there are some fundamental’s that I learnt that I will share with you . if you follow these guidelines you should be ok and not make the mistakes that others have made .

Step 1 , Know your market or area well, don’t build houses in areas you don’t know or what product is selling well, if you live in a certain area you are probably owning your own home or renting and you know the reasons why you live there, what you like about it, and also you will have a good feel of what properties are worth . So if you know the area where you want to build and you know the product that is selling you are now ready to take your first steps .

Step 2, Do not build anything until you have seen what has been built and how much it has sold for, this way if you have the information available you can actually back-cost the house that sold and see if any profit was made . One example that I came across a few years ago was a new subdivision that had cheap land for sale, it was cheap because it had power-lines running through it, it was tempting to buy because there was a 20 % discount on this land . Fortunately there had been some houses already built and I knew the sell price and simply back costed the last two houses that sold, to my surprise they actually made no profit . The power lines has stigmatised the area so much that it was a futile exercise .

Step 3, In my previous example I told you back cost the project and to do this you need to know these four fundamentals, the land cost, the build cost, the holding costs and finally the marketing and commission costs .

The land cost can easily be found out by using tools such as www.rpdata.com or my favorite website www.pricefinder.com.au  to see what land has actually sold for, don’t rely on the retail price of the land as sometimes the land has been discounted.

The build cost, unless you are a Builder yourself you wont know how much it cost to build, you will need to talk to local builders who build similar products, you will probably find that most local builders have standard plans and can easily give you a quote for something similar, the price will have to be a full turnkey price, “a full turnkey price is when you can move into the house and there are no extras you need to pay for “, it is quite a common for Builders to quote cheap prices that don’t include items such as carpet, water tanks, landscaping, driveways, fences etc . You must have the full price to make this exercise work .

Holding costs are such an important part of developing and this is where a lot of people have become unstuck, most people will have to borrow money on the land and the build for the house, for a standard house on a flat block of land allow for at least a years holding cost on the land and 6 months on the build of the house, ie you pay $240,000 on the land including stamp duty and borrow at 8 % your holding costs for the year are $19,200 for the land, the house build cost at say $200,000 at 8 % is $16,000.00, using a rough rule of thumb divide the interest costs for the house build by 2 as you progressively drawdown this amount and will not be hit straight away with the full amount . In total you will have $19,200 for the land and $8,000 for the house equalling $24,000.00  in interest costs.

Marketing and Commissions costs, these are another cost that must be factored in back costing, its a simple reality that you have to market your house to sell it, allow for at least $2000.00 for marketing and negotiate with your agent for the commission costs, on average 3-4 % of the sell price .

Step 4 , Is it viable ? If you are going to invest money in a development over a period of a year or two you need to factor in not only the costs involved but the opportunity costs as well, what is an opportunity cost ? basically ”what would be an alternative investment return if i invested somewhere else ? ”, if you are developing and the return is only 5 % but you can get 10 % in some other investment then obviously you wouldn’t go with the 5 % return .

Ok, we can now back cost our development and see if it is feasible, lets take a 4 bedroom house that has recently sold for $500,000 our back costing will look like this :

House sold for                           $500,000

Land cost                                   $240,000 – including stamp duty – varies between states

House build cost                        $200,000

Interest costs                             $  24,000

Marketing / commission             $ 18,000 

Total back cost                           $482,000

We can then see from this example we have made $18,000.00 profit, is this feasible / would you go ahead with this ? it would really depend on how much of your own initial capital you put in, the time factor to get that return and the level of risk, ie is the market going up or down and also what other return would I get if I invested elsewhere ? generally you would like to have at least a 5 – 10 % gross return, this exercise came in at 3.6 % so it would be somewhat marginal . Remember if it took longer to sell that profit could easily be wiped out by the interest costs alone. (GST has been omitted for clarity in this example )

Step 5 , You have now back costed your development, review it, does it look promising ? is it marginal ? if its marginal, revisit the project, how about building a 5 bedroom house ? what about offering a better product ? all of these options can be played with until you come to your conclusion .This is the basics of developing, it can be scaled up or down but if you look at the four fundamentals you can always see if it is a worthwhile proposal or not.

ARE the ASIC, scam and swindlers themselves ?

If you have a company in Australia, everyone has to be registered under the regulatory body of the ASIC, The Australian and Securities Commission . There has been a lot of talk in the news recently about scammers targeting investors with flash websites and good sales pitches but it has come to my attention that the ASIC are ripping of small businesses themselves . Why do I say that ? If you have a company every year you have to pay an annual company statement review fee of $226.50 every year, do you actually know what this money is for ? review of what ? what if you haven’t changed anything for the entire year ? do you get any benefit from the ASIC for this ? No Iam afraid not, what about if you late in paying this ? straight away you will get hit with a $69.00 late payment fee, what about if you are another month late ? Bang! another $218.00 late payment fee !

Excuse me, but isn’t there some Government legislation that tells you cant apply any fees that are more than the actual costs of remedy the problem ? does it actually cost $218.00 to send out a late payment letter ? Now if you think this is bad, wait until you try to change your address ! . Do this online yourself and save the extra work for ASIC employing staff to answer your phone calls, guess what ? they charge you $287.00 to change your address ! What ? I have just done it online myself and they send you and invoice for the privilege ?

Scam ? rip off ? It is definently my opinion that this is !

 

Any Time You Own a Rental Property a Tax Depreciation Schedule Is Necessary

If you have a property that you are renting out or leasing, and this property is producing income, it is a good idea to employ a Quantity Surveyor to produce a tax depreciation schedule. Whilst it is not a mandatory requirement, you will find that the benefits far outweigh the costs.

Business Tax Depreciation Schedules Will Save You Money

There are many different scenarios where you may need a schedule or report. For example, you could be a property investor who has a portfolio of properties and have never done one before, or you could have just purchased your first investment home. In either of these instances, an investment property depreciation report can save you money every year at tax time.

Renting Your Old Home Means Property Tax Deductions

Recently, due to the depressed property market, a lot of people have been unable to sell their houses and instead of selling at a loss now, decide to buy a new house. They end up keeping the old one and rent it out to others. Even if you have an old house and never realised that it was worth, getting a report will certainly surprise you with what is remaining and claimable.

Accounting for Tax Depreciation Following Remodelling

Have you done some recent renovations or additions? If so, this is a good time to bring in a quantity surveyor to look at the construction costs for tax depreciation purposes and to produce a new report. The improvements are deductable and can greatly increase your cash flow. Do you have a business that contains plants and equipment? A motel, hotel or cafe? All items used to produce an income are tax deductable and should be included.

These Schedules Are for Every Investor

What you need to realise is that it is not just large investors that should be taking advantage of this kind of service, but also the average mum and dad investors. If you have a rental property, you should get a house depreciation schedule. It will greatly increase your cash flow and when it comes to tax time every year most people will get a nice tax refund.

Making the Most of Your Money

Given the fact that you are renting your house as a means to earn money, you need to take advantage of a house depreciation schedule to help ensure you are not paying too much in taxes each year. With our careful accounting, we are here to help ensure you never overpay your taxes. Once we have established your schedules, you may even find that you qualify for a refund each year. Contact us today and let us show you how we can save you money.