Creatively depreciating your house - Posted by Durand (Sydney Australia)

Real Estate Investing
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Posted by thedonald (ONT-CDN) on July 20, 2000 at 15:19:21:

Try the Kiyosaki forum over at richdad.com for much more discussion about RE that is NOT US-centric in focus.

Lots of discussion about OZ and New Zealand method, including the “negative gearing” that seems so crucial to RE in that market. Since it relates to “negative cashflow”, you might think it might be avoided, but for tax purposes, you actually want to show as much of it as feasible (depreciation/capital cost allowances should offset it).

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Creatively depreciating your house - Posted by Durand (Sydney Australia)

Posted by Durand (Sydney Australia) on July 19, 2000 at 08:46:31:

OK, this one is a little left field.

Houses are depreciated really slowly - over the course of 40 years or so in Australia. If we can find a way of depreciating them faster, we can end up with bigger losses for tax purposes (which is great! Less tax to pay, right?)

Computers are depreciable over a period of a couple of years. The thing is, not all computers are beige boxes. Stonehenge for example, is recognised as the first computer ever built by humans, because it can be used to calculate the winter solstice. (Particular types of shadows are cast by Stonehenge at this time because of the way the standing stones all line up.)

So… if a person is building a house, and they design it so that the angle of the windows, or the shape of the roof, (or whatever) is able to calculate, say, the winter solstice, then you haven’t built a house at all, but rather a computer. Sure, it’s not an electronic computer, but it would be a computer nonetheless. The fact that people might choose to live in it would be besides the point!

Would this be a good enough argument for the law to allow us to depreciate the thing over two or three years?

(NB: I thought of this after seeing a bank of electronic lockers. You put $2 in and a computer assigns you a pin number that allows you into it a particular locker for 2 hours. I was told that because it was controlled by a microchip, the WHOLE bank of lockers was considered computer hardware, and was therefore depreciable over 2.5 years. To buy the whole bank of lockers would cost $100,000 - as much as a house! If a clump of metal with a lock on it can be considered computer hardware, maybe so can a house?)

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There are some common items… - Posted by soapymac

Posted by soapymac on July 20, 2000 at 07:41:23:

between OZ, Canada, and the US. There are also some unique differences.

What is common is our basis in real estate law. All three countries are based upon English Common Law because all three nations have Great Briain as a source for their present body of law.

So I’m going to share with you what I believe is common to all three nations, and in the same breath tell you to get a solicitor who specializes in real estate law in OZ as part of your team.

That said, I would ask FIRST, why are you considering just the benefits of tax depreciation only? Is this for a rental property, OR, as I perceive your post, you are trying to creatively apply law of one type of investment to another?

If you have read the series of books by Robert Kiyosaki, I would recall to your remembrance that he does NOT consider where you live as an ASSET. (That’s Kiyosaki’s definition, folks…not mine.)

If, however, you are considering tax depreciation as part of the investment cashflow overall, my question is, “WHY?” Is there something different in the body of RE law in OZ that MAKES depreciation a relevent item…OR should any depreciation be considered as “gravy” to the transaction?

I’ve noticed in other posts on the board from OZ that the concept of negative gearing (negative cashflow is the US term) is important. Again, I ask, “WHY?” To the best of my knowledge, profit is made going in to a transaction: putting that profit in your pocket should be done at the closing table…not when you sell and get out. Further, positive cash flow (positive gearing) should be the goal while you OWN the property. That is one statement, in all the posts I’ve seen from OZ, that is particularly noticeable BY ITS ABSENCE.

Forgive me for rambling, here. My son and daughter-in-law live outside Toowoomba and my son knows enough about RE to ask some intelligent questions of his father. The idea of making a profit going in to a deal is one that he knows, and he, too, is scratching his head to answer the same questions that I am posing to you here.

I’ve said all that…to ask this: what is there in RE law in OZ that makes negative gearing and depreciation SO important? I believe if you answer those questions, you may discover a way to answer your own.

Cordially,

Roy MacLean
“soapymac”

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Questions about OZ - Posted by thedonald (ONT-CDN)

Posted by thedonald (ONT-CDN) on July 19, 2000 at 14:33:07:

In Oz, banks still hold the title to the house while you pay it off, right?

Are the mortgage loans up to 40 years - or considerably shorter, as in Canada?

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Re: There are some common items…But… - Posted by Eric C

Posted by Eric C on July 20, 2000 at 10:21:41:

Hi Roy -

Excellent post! I don’t think you’re rambling at all.

When you get the answers to your questions, will you please email me.

I, too, am bewildered about these “benefits”. They sound too much like the marketing blather of the old RE syndications and Limited Partnerships to me.

Yours,

Eric C

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Re: Questions about OZ - Posted by Durand

Posted by Durand on July 20, 2000 at 04:09:14:

Mortgages in Australia are generally 20, 25 or 30 year terms. Mind you, there is now heavy competition among the mortgage lenders so it would be easier to get the terms you want. eg, some loans allow you to pay it off faster (sometimes with penalties, sometimes without but with a higher interest rate). If you don’t make your payments, the banks do get the rights to reposess your house, so I guess it’s like most places like that.