Depreciation legislation will change investor property preferences and help developers: Tyron Hyde

Tyron Hyde expects property investors may start looking into commercial and other forms of non-residential property following the passing of Federal Budget legislation on depreciation claims.

The chief of Washington Brown also expects investors will be looking into different structures to acquire the property – like companies, that have not been affected.

Parliament has passed the legislation yesterday which changes how depreciation deductions on a second-hand property can be claimed. 

Hyde says the six key takeaways from the legislation are:

1.   If you acquire a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.

2.   Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date. This is great news for the property industry and the way it should be.

3.   The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.

4.   The building allowance or claims on the structure of the building has not changed at all. You will still need a Depreciation Schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.

5.   The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note Self-Managed Super Funds do not apply here) or a large unit trust.

6.   Perhaps the most interesting point: Whilst investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property.

Tyron Hyde suggests while there has been some merit in regards to these changes, "a more balanced approached would’ve been more suitable."

"These changes will create a two-tiered property market in my view, where investors selling near-new property will struggle to compete with those selling new property.

"Developers should be dancing in the street, as there stock is now more appealing to investors.

"I suspect investors may start looking into commercial and other forms of non-residential property and also looking into different structures to acquire the property – like companies, that have not been affected."