For property investors in the Australian market, purchasing a newer or older property each have their upsides. While the property and its appeal to tenants is a significant factor in the investment’s success, buyers need to also consider the location, ongoing costs and tax benefits to ultimately decide which kind of property is best for them.
We explore some important factors for investors to consider when making their purchasing decision.
Understanding depreciation benefits
New properties come with depreciation benefits, which can reduce your tax burden significantly.
In Australia, property investors can claim depreciation on both the building itself and the fixtures or fittings within the property. The Australian Taxation Office allows property owners to claim this depreciation as a tax deduction in two ways:
1. Building Depreciation (Capital Works Deductions) refers to what an investor can claim for the wear and tear that occurs to the structure of the property. This includes any structural improvements that may have been made during a renovation.
Investors can claim depreciation on the building structure if the property was built after 16 September 1987.
Generally, the building can be depreciated at 2.5% per year over 40 years. This means if an investment property was built in 2000 and cost $200,000 for construction, you could claim $5,000 per year until 2040 as a depreciation deduction.
2. Plant and Equipment Depreciation
This refers to the wear and tear on items within the property, such as appliances, carpets, blinds, and air conditioning.
If you’ve bought an existing property, you can claim tax breaks on depreciating assets no matter how old the property is.
Investors should note that owners of second-hand residential properties where contracts exchanged after 9th of May 2017 are no longer eligible to claim depreciation on existing plant and equipment assets, such as air conditioning units, solar panels or carpet. However, owners of these properties can still claim depreciation on the plant and equipment assets they purchase for their property.
Maintenance costs comparison
Older properties
Older properties may have higher maintenance costs, while newer builds are less likely to need immediate repairs.
Older properties often have wear and tear on essential systems like plumbing, wiring, roofing, and foundations. These can require more frequent and costly repairs.
Replacement costs are another factor, as investors may need to replace items like appliances, water heaters, windows, or HVAC systems as they age out of their useful life.
Depending on the age of the property, investors may also need to upgrade to meet modern building codes or safety standards (e.g., electrical wiring, insulation, fire safety), adding to maintenance expenses.
Issues such as cracks in foundations, roof leaks, or deteriorating materials (e.g., timber or stone) are common in older buildings and can require substantial investment.
Older properties may experience small but frequent repairs, such as fixing leaks, repairing older flooring, or replacing worn fixtures.
Newer properties
Newer properties, on the other hand, have lower initial maintenance as they are fitted with brand new systems, new construction materials, updated plumbing, electrical systems, and appliances, which usually come with warranties. These systems are less likely to require immediate repairs, keeping costs low in the first few years.
New buildings are also designed to meet current building codes, energy efficiency standards, and safety regulations, reducing the need for expensive upgrades.
New builds often come with warranties for structural elements and appliances, covering potential repairs for a set number of years (usually 5-10 years), which helps reduce early maintenance costs.
Investors can also benefit from energy efficiency savings in newer homes, which tend to have better insulation, modern windows, and energy-efficient appliances, which not only reduce ongoing utility costs but also extend the lifespan of certain systems, minimising future repairs.
Rental appeal: charm vs. modernity
Older homes may have unique character, while new builds offer modern conveniences. Consider what’s more attractive to tenants in your market. Your property manager will be able to advise on the tenant demographic of your suburbs of interest and the properties most in demand.
Long-term capital growth potential
Most property investors opt for capital growth of their properties as their strategy to make the most profit. Properties with high growth potential will sell for more down the track when the time comes to sell the property.
Research the area's growth trends—older homes in established areas may see greater long-term value, while new developments might have a faster initial rise.
Properties with the highest capital growth potential tend to come with a higher purchase price. This means initially the property will have a negative cash flow, meaning the cost of owning the property outweighs the income it generates. In this case, investors can take advantage of negative gearing tax benefits to offset taxable losses against other income and produce tax savings.
Stamp duty and purchase costs
Older properties may have lower initial costs compared to new properties, which often have higher stamp duty and taxes.
In older property or existing homes, stamp duty is calculated based on the purchase price of the property. In most states, there are no concessions or exemptions for investors purchasing existing properties, meaning they will pay the full stamp duty rate on the property’s market value.
For off-the-plan or newly built homes, investors may benefit from stamp duty concessions in some states or territories. These concessions can apply if the property is still under construction, or if certain government incentives are available, such as in first-home buyer schemes.
Ensure your property is in the best hands. Our team is highly knowledgeable in current legislation and has extensive experience in managing and enhancing investments.
Contact us today for a free rental appraisal and experience The Agency difference.