There are a range of factors that a Quantity Surveyor must consider when calculating how much depreciation needs to be provided for a given property. One of those factors is the property type, especially between apartment units and houses. While there are a variety of similarities in how depreciation is calculated for both houses and apartments, such as the age of the property and the purchase price, differences emerge when you consider how the properties are built.
While houses will generally have a larger gross floor area compared to an apartment with the same number of bedrooms, an apartment unit would require more labour to build due to multiple floors having to be accounted for which usually makes their build cost comparable to a house in regards to capital works (division 43). This is especially the case for brand new apartment units with a high number of floors. Apartment units can also claim a small portion of the common areas which further increases the depreciation that they can claim under plant & equipment (division 40). This can lead to situations where some apartment units will cost more to build than a house despite the lower gross floor area. This means that an owner of an apartment unit can claim an equal or even greater amount of depreciation on Division 43 Capital Works compared to a house.
Another key difference is how much Plant & Equipment (division 40) the two property types can claim. While both houses and apartments can claim on standard plant and equipment such as the oven, light shades and blinds, owners can also claim on a portion of the common strata equipment found in the common areas in the apartment. This includes the common items such as lifts, gym equipment and fire extinguishers which can be claimed under Division 40 Plant Equipment. This source of depreciation allows owners of apartment units to generally claim more depreciation compared to houses especially during the first few years of depreciation. However, this is only relevant if they are eligible to claim on Division 40 items as per the Treasury Laws Amendment (Housing Tax Integrity) Act 2017, find out if you would be eligible here.
In summary, due to the higher cost to build and eligibility to claim strata items, an owner of an apartment unit will generally be able to get a higher tax deduction per year than an owner of a house ceteris paribus. It is important to note, however, that depreciation is only be one factor when deciding to purchase a house or unit for investment.
To illustrate the higher yields in depreciation, an example is provided below which details the case of three brand new three-bedroom properties built in 2017 and their estimated depreciation over three years:
| Property Type | Purchase Price | Year 1 | Year 2 | Year 3 | Cumulative 3-Year Total |
|---|---|---|---|---|---|
| Three-bedroom Residential House | $700,000 | $12,584 | $11,716 | $10,828 | $35,128 |
| Three-bedroom Low-rise Apartment | $700,000 | $15,030 | $13,813 | $13,111 | $41,954 |
| Three-bedroom High-rise Apartment | $700,000 | $16,815 | $15,255 | $14,399 | $46,469 |
Needless to say, although it is evident that there is higher depreciation in a newer apartments and houses, there is a sufficient amount of depreciation available in older homes to make it worthwhile in obtaining a report.
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Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.
