Investors and buyers alike have numerous things in mind while buying a property. Tax deductions are a small but significant part of those deliberations. As a smart property investor, one must always lookout to save money while getting the best.
One of the most common deliberations among investors is choosing between a new or an established property. Both have their own pros and cons. However, when it comes to property tax depreciation, new properties easily take the cake. Let’s take a look at the reasons behind it.
The construction cost of a building is always directly proportional to the tax deductions allowed under Section 43. Now, consider a building constructed ten years ago. Due to inflation, the construction cost of the building was lower compared to the current prices. On the other hand, a brand-new building will have a higher construction cost. Note that this comparison is made by assuming that both buildings are identical, using the same amount of construction materials.
Hence, we can see that new buildings have higher costs and thus higher tax deductions, while established properties have lower deductions.
Maximum effective life
The entire possible life of an asset before it is deemed no longer useful is called the “maximum effective life”. New properties tend to install new assets in them, hence they always have the optimum maximum effective life.” On the other hand, established properties have assets already in use. Greater maximum effective life means that one can have depreciation at accelerated rates for a longer period of time.
Ineligibility of second-hand items
Second-hand assets have many practical and financial benefits. However, they are not eligible to be claimed under the house depreciation report. The only time second-hand assets could be claimed is collectively during a sale. Established properties often have many second-hand assets bought during the lifetime of the property. On the other hand, new properties will always install new assets. This gives a much broader scope of claiming tax depreciation in a new property than an established one.
Example to Illustrate
Let’s consider a brand-new condo and a similar condo, which is 2-years old. We chart the capital allowance and depreciation for each over 5 years. Both property depreciation reports were subjected to the same tax rate of 32.5 percent.
At the end of it, the used condo had a cumulative tax deduction of $38,750. On the other hand, the brand-new condo offered a whopping tax deduction worth over $60,000. The new condo saved the investor $19,641, while the used condo only saved $12,593 – a difference of around $7000! This is the degree of difference new vs old property could make to your pockets.
That being said, old properties are not completely useless on the tax front. Old properties have their own plans for claiming tax depreciation. If you want to buy an established property, nonetheless, it is always worth checking out the plan for tax depreciation.
Tax deductions are not the ultimate factor while deciding a great property – for living, business, or pure investment. However, depreciation for tax purposes is important for you; you now know why new properties will always be better.