Maximise the Cost of Construction

[12InvestParticipant@12investJoin Date: 2011Post Count: 2]

January 24, 2011 - 10:04 am

Hello Everyone,

I am a newbie and in the process of learning how to invest. I read this article about maximizing the cost of construction for the purpose of depreciation on the following website (http://www.washingtonbrown.com.au/tax-depreciation-tips). However, I am a bit confused by the following explanation:

“By way of example, we had a client that bought a property in Sydney’s western suburbs for $250,000 last week. It was a two-year old, two-bedroom unit.

We were the quantity surveyors on the project – and I know the original construction cost for that unit was $175,000. But its purchase price – brand new – was $335,000.

Guess what? We still use original construction cost as the basis for the incoming property investor.

So not only has the new purchaser paid less stamp duty and increased their chance of a capital gain – their depreciation deduction relative to the purchase price has also increased.

So this property would be cash flow neutral at worse – cash flow positive at best.”

I understand the concept of maximizing the construction cost to get maximum deduction but not sure about the following comments:

“So not only has the new purchaser paid less stamp duty and increased their chance of a capital gain…”

1) How can the new purchaser paid less stamp duty? I thought stamp duty is based on the actual purchase price (in this case $250,000).

2) The statement “increased their chance of a capital gain” doesn’t sound right. By increase the capital gain, don’t they get tax more? I thought the whole purpose of maximize the construction cost is to reduce the capital gain hence reduce CGT?

Hope someone can help clarify.

Thanks,
Gracie

[Jacqui MiddletonParticipant@jacmJoin Date: 2009Post Count: 2,539]

January 25, 2011 - 12:15 am

When you buy off-the-plan, you essentially get to see a piece of land where a developer proposes to build a dwelling.  You only get to see plans and artists images of the proposed dwelling.  You pay less stamp duty when buying off-the-plan, because the dwelling doesn't yet exist.  So you effectively pay stamp duty only on the land price.  When buying off-the-plan, you hope that the value of the whole thing will go up during the course of construction, thus "increasing the capital gain".  You do not pay tax on a capital gain (ie the increased value of a property) unless you sell it.  You simply high five yourself for the fact that the property is now worth more than you paid for it.  And if you wish, you could refinance it, and use the "increase in value", otherwise known as equity, as a deposit on yet another property.

Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone Me

VIC Buyers' Agents for investors, home buyers & SMSFs.

[xdrewParticipant@xdrewJoin Date: 2010Post Count: 479]

January 25, 2011 - 12:24 am

I'm a skeptic with off the plans. I get a wonderful showroom, a Da Vinci on the wall showing how wonderful its going to be, and finally a developer who can now afford to escape to Rio De Janiero on my deposit. I know that most builders work on a trust basis with these schemes, but i guess i'm just more of a visible bricks and mortar man. I like to know that the property actually exists, there is a subdivision and land title for it and I can stick a tenant in on transfer of ownership.

Call me hopelessly old fashioned.

[12InvestParticipant@12investJoin Date: 2011Post Count: 2]

January 26, 2011 - 1:04 am

Hi JacM and xdrew,

Thanks for explaining the off-the-plan option. I guess the article by Washington Brown is not exactly correct then, as it refers the property as a 2 year old property, hence, cannot get any discount on the stamp duty.

Cheers,
Gracie

[jasonfonsecaMember@jasonfonsecaJoin Date: 2010Post Count: 44]

January 26, 2011 - 6:24 am

“their depreciation deduction relative to the purchase price has also increased.” that sounds wrong.

Depreciation is always calculated based on construction costs, so they would be depreciating on 175k less 2 years of depreciation. What they have said implies that depreciation for owner one was 175k over x amount of years and now for owner 2 it will be 250k over (x-2) years

Depreciation has a big effect on property cashflow. People looking for a cashflow positive place should generally see depreciation as one of the biggest factors. Generally rental income is always offset by rental income (depending on rental yield) and expenses. Depreciation comes in with a what is known as a “paperloss” which brings down your taxable income thereby saving you a fair amount of tax money.