The Block pumps more money into builds than it makes in sales, creating extraordinary tax hack

The Block is pumping up to $1m more into renovating homes than it makes selling them, and it’s opened the door to a bizarre tax hack.

The Block houses in Hampton East could prove tempting for wealthy investors thanks to a rare tax hack. Picture: Ray White.

The Block is pumping up to $1m more into renovating homes than it makes back selling them.

And it’s created a bizarre tax hack that could allow super-wealthy investors to claim more in deductions for the properties than they paid for them, with one of the show’s most prolific buyers revealing he sought advice to check it was legal.

The figures also hint Channel 9 is facing a multimillion-dollar loss on the homes going under the hammer this weekend.

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Depreciation schedules prepared by BMT Tax Depreciation for the latest season show the 1950s brick homes they’ve extensively renovated and furnished along Charming St, Hampton East, are worth anywhere from $3.745m up to almost $5m in material value.

Most of the homes had already been expected to sell for a loss this season after The Block producers paid record sums to obtain them, including shelling out $3.5m for 20 Charming St alone — with that home listed for sale at just $2.8m-$3m ahead of its auction.

What homes on Charming St, Hampton East looked like before The Block renovations.

The quantity surveyor documents show the exhaustive renovations and furnishings added to that home mean it could now be depreciated for anywhere from $4.073m-$4.752m across the next 40 years, including up to $180,000 in tax deductibility in the next year alone.

While sale prices for Hampton East will be revealed on tonight’s finale, four of the home’s the Block relocated to Gisborne for last season were so exhaustively renovated the buildings were worth at least $500,000 more than buyers paid for them, after an auction wipe out left most of the homes struggling under the hammer.

Losers Dylan Adams and Jenny Heath’s $3.9m sale price was potentially $1m less than the $4.643m-$5.417m assessment of the value of potential tax deductions for the property.

CHARMING ST, HAMPTON EAST (2023)

House 1 – Kyle and Leslie

Asking price: $2.7m-$2.9m

Purchase price: $3m

Depreciation value: $3.745m-$4.369m

House 2 – Leah and Ash

Asking price: $2.7m-$2.9m

Purchase price: $2.3m

Depreciation value: $4.083m-$4.764m

House 3 – Kristy and Brett

Asking price: $2.7m-$2.9m

Purchase price: $2.75m

Depreciation value: $3.977m-$4.64m

The Block House 3 in this season of the show. Pictures: Belle Property

House 4 – Steph and Gian

Asking price: $2.8m-$3m

Purchase price: $3.5m

Depreciation value: $4.073m-$4.752m

House 5 – Eliza and Liberty

Asking price: $2.8m-$3m

Purchase price: $2.75m

Depreciation value: $4.283m-$4.997m

Source: BMT , CoreLogic

“The total deductions end up being more than what they actually paid for the property,” said BMT chief executive Bradley Beer.

Mr Beer added that past schedules showed The Block had sold homes for less than their material cost for quite a number of seasons, with apartments renovated in the Glasshouse season in 2014 barely selling for more than the build cost, and subsequent overhauls having become ever more excessive.

One of The Block’s most prolific buyers, Danny Wallis, this week said he was aware of the extraordinary scenario presented by the deductions and had checked with his tax adviser that it was legal.

Mr Wallis said he had questioned how depreciation could apply when many of the goods and materials used on the show were provided at heavy discounts or without charge often in return for promotion on the show, but had been assured it was above board.

Danny Wallis has been one of The Block’s most prolific buyers.

“But the deductions do make them quite a good purchase,” he said.

Speaking before this year’s auctions were filmed Mr Wallis noted he was expecting the show to take a “big loss” on the homes, particularly given they had paid record prices for Hampton East to secure five on the same street.

While the full multimillion-dollar deductions allow owners to make tax claims against the property for 40 years, the first 10 years are typically the most lucrative.

Last year’s most expensive build, renovated by Ankur and Sharon, could lead to deductions of as much as $1.032m in the first five years and another $752,000 in the next five.

However, Mr Beer said “it wasn’t completely free money”, with only a portion of the deduction being handed back to investors in the form of a tax return or reduced tax liability.

GISBORNE (2022)

House 1 – Tom and Sarah-Jane

Sold: $4.1m

Depreciation value: $4.512m-$5.264m

House 2 – Rachel and Ryan

Sold: $4,249,000.85

Depreciation value: $4.896m-$5.713m

House 3 – Ankur and Sharon

Sold: $4.25m

Depreciation value: $5.006m-$5.84m

Ankur Dogra and Sharon Johal’s renovation on The Block was valued at more than $5m.

House 4 – Dylan and Jenny

Sold: $3.9m

Depreciation value: $4.643m-$5.417m

House 5 – Omar and Oz

Sold: $5,666,666.66

Depreciation value: $4.215m-$4.918m

Source: BMT Tax Depreciation, CoreLogic

For a high-net worth individual, they would typically get 45 cents for each dollar of the deduction in their return — about $98,500 from the $218,743 first-year potential deduction of Ankur and Sharon’s property from last season.

However, those claims would raise the gains tax bill if the investor later sold the home.

“But it is still quite lucrative,” Mr Beer said.

His firm has produced about 800,000 depreciation schedules for investors across the past 2.5 decades, and typically found owners could claim $10,000 a financial year.

Mitchell Partners accountancy firm managing director Alan Mitchell said the tax hack was “very rare” with only research and developments likely to yield similar returns.

“Someone’s obviously lost money,” Mr Mitchell added.

Omar and Oz’s shock mega sale last year made theirs the only home to sell for more than its material worth.

Buyer’s advocate Cate Bakos said the figures showed why the homes could appeal to wealthy investors, but the numbers troubled her.

“They have certainly overised,” Ms Bakos said.

“And it signals the growth will be tricky.

“If the building is depreciating in value faster than the land appreciates, there’s a possibility that you will see them worth less than you paid for them. This is why I wouldn’t call them a good investment.”

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Originally published as The Block pumps more money into builds than it makes in sales, creating extraordinary tax hack