A recent analysis conducted by the Property Investment Professionals of Australia (PIPA) and the national firm MCG Quantity Surveyors has unveiled a significant disparity in the depreciation benefits available to investors of new-build properties compared to those purchasing established homes. The study, which examined over 4,000 residential investment properties settled since 2024, highlights a growing advantage for new-home buyers, driven by post-COVID construction cost increases and legislative restrictions on second-hand plant and equipment deductions.
The research emerges as investors weigh the potential impacts of proposed Federal Budget changes to negative gearing and capital gains tax. According to MCG Quantity Surveyors Managing Director Mike Mortlock, the findings underscore a fundamental shift in the investment landscape that is often overlooked. “The post-COVID escalation in construction costs has significantly raised the capital works cost base for newly completed properties,” Mr Mortlock explained. “At the same time, established property buyers are legally restricted from claiming depreciation on existing plant and equipment assets, which has created a significant gap.”
Mr Mortlock further noted that the policy environment is influencing investor behaviour as much as the numbers themselves. “After the 2017 budget changes, we saw more investors gravitate toward new properties because of the way the depreciation rules were changed,” he said. Expressing concern about the proposed changes, he added, “My concern is that these proposed changes could produce a similar behavioural shift. While new housing supply is clearly important, investors need to be careful not to assume that every new property is automatically a good investment. In fact, this part of the market has often attracted spruikers, inflated pricing, and poor-quality advice, so investors still need to assess the fundamentals carefully.”
The study reveals a stark contrast in depreciation benefits across various dwelling types. “Brand-new units deliver an average first-year deduction of $23,124 compared with $6,526 for established units – a 254 per cent premium,” Mr Mortlock stated. “New houses deliver $20,723 on average in the first year versus $6,281 for established homes, while new townhouses deliver $18,957 compared with $8,125 for established stock.”
The proposed property taxation changes are expected to further accentuate these differences. Mr Mortlock elaborated on the potential tax benefits, saying, “For an investor on a 39 per cent marginal tax rate, a first-year deduction of $23,124 can translate into a tax benefit of more than $9,000. Plus, when you look at lifetime deductions over 40 years, which is more than $599,000 for new units and nearly $492,000 for new houses, the long-term tax shield is substantial.”
PIPA Chair Cate Bakos also weighed in on the findings, emphasising that while the data is valuable for investors navigating the transition to the proposed reforms, depreciation should not be the sole factor driving a property investment decision. “Depreciation can strengthen cash flow and, under the proposed reforms, provide a powerful future tax shield, but it’s not a substitute for investment fundamentals,” Ms Bakos stated. “The asset still has to stand on its own merits, including location, scarcity, demand, quality and long-term growth potential. Depreciation enhances a strong asset, but it doesn’t rescue a weak one.”
The analysis highlights the need for investors to carefully consider the broader investment fundamentals beyond depreciation benefits. As the real estate market continues to evolve, understanding the impact of legislative changes and construction cost trends will be crucial for making informed property investment decisions.