Are The Block houses a good investment? Experts reveal tax deductions are double the price guides
Investors are circling The Block houses ahead of the November auctions on Phillip Island after it has been revealed that the tax deductions on the homes are double to triple the asking prices.
This year’s tax deductions could weigh in massively as a deciding factor, and many investors are already eyeing off the properties, says BMT Tax Depreciation chief executive Bradley Beer.
“Tax depreciation can significantly enhance the investment value of a property … offering an exceptional investment opportunity,” he says.
BMT Tax Depreciation has revealed the properties’ estimated total depreciation deductions range from $4.4 million to $5.2 million per house – nearly triple the $1.7 million to $1.85 million current price guides.
“House depreciation has two claims; one on the structure of the building like bricks, concrete floors, walls, roof and things that last a long time and get claimed over 40 years … and the other is called plant and equipment, which are things like carpet, hot water service, blinds and curtains.
“You can claim furniture quicker; hence, the early years of deductions are higher,” says Beer.
The Block houses are expected to have an average of $166,000 in potential tax deductions in the first year alone.
“The thing that’s unusual [about The Block houses] is that they spend more on these houses than they expect to get as a purchase price. And the depreciation claims actually relate to construction costs,” says Beer.
“Usually, developers build things and they like to have a bit of profit [from the property’s construction], but in this situation the actual construction costs are significantly higher. ”
This week, The Block contestants were tasked with the annual depreciation challenge – a brain-stretching task in the middle of what was already a stressful week with backyards – but the chance to win $5000 had the teams guessing how much had been spent on their houses including all the furniture, appliances, and artwork.
Maddy and Charlotte in House 1 ploughed a lot of time and effort into calculating their deductions down to the final nail, screw and bolt. However, it was Brad and Kylie of House 4 who took out the win and the $5000 cash … after Kylie took a wild guess at the last minute.
When it comes to tax depreciation, The Block houses have always been a bit special because the tax deductibles are generally higher than the actual price guides. This is because the cost to renovate the homes tends to be much higher than normal. Plus, when someone buys a house, it comes with all the furniture and knick-knacks, allowing it to have even greater tax benefits to investors.
When competing to bring in a buyer, it’s essential for the houses to also appeal to the investor segment, says Domain chief of research and economics Dr Nicola Powell.
“You can’t forget that segment, and what the investor looks for is depreciation, it’s tax purposes,” she says.
“So, the home that has the largest depreciation schedule will likely have the greatest interest from investors.”
Last year, Eliza and Liberty’s house ( House 5 ) generated the highest deductions, estimated at $4,996,640, with their first full financial year deduction at $173,860.
“This year they’ve spent a little bit more,” says Beer. “They seem to always manage to ‘up-spec’ it a bit each year.”
This year, it’s Kristian and Mimi’s house ( House 5 ), with a total estimated tax deduction of $4.878 million to $5.391 million, followed by Kylie and Brad with an estimate of $4.834 million to $5.342 million and Ricky and Haydn’s house ranging between $4.842 million and $5.352 million.
However, Kylie and Brad’s property is estimated to have the largest first-year tax dedication claim, at an estimated $176,000.
The BMT Tax Depreciation assessment says Maddy and Charlotte have the property with the lowest estimated total tax deductions at $4.24 million to $4.685 million, followed by Courtney and Grant, $4.26 million to $4.708 million.
Unlike other years, the new owners of The Block houses will also be able to depreciate part of the communal areas.
The prices and the tax deductions increase each year at The Block due to growing construction costs, says Beer.
“[Tax depreciation and tax deductions] are a little bit more than previous years’ numbers because construction costs have gone up. These houses are smaller, but they still spent more on them,” he says. “If I averaged all [the numbers] out, this year’s would be 10 per cent more [in tax deductions].”
While the first-year estimated tax depreciation numbers are high across all the houses, a good chunk of it comes from the furniture, says Beer.
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