investment property depreciation tax benefits of property investment

How the government will help to pay for your Investment Property

 

Whether you are an existing Property Investor or considering taking the step into Investment Property ownership, one of the major concerns faced is how to meet the loan repayments.

Obviously the property will be tenanted with a market rent being collected every week or fortnight.  If this rent is greater than the loan repayments then this is what is called a “positive geared” property.  Often times the rent collected will be below the amount required for the loan repayments, so how can you make up the difference? Answer:- use your investment property tax deduction entitlements.

depreciation on investment propertiesWhen you own an investment property then the Australian Taxation Office (ATO) will usually allow you to claim a tax deduction for the depreciation of the assets and property.   Anyone who purchases a property for income-producing purposes is entitled to depreciate both the items within the building and the cost of the building itself – against their accessible income.

Of all the tax deductions available to residential property investors, property depreciation is most often missed because it is a non-cash deduction – the investor does not need to spend money to claim it.

As a building ages fixtures and fittings start to wear out – that is they Depreciate.  This depreciation or wear and tear on the property can be claimed as a tax deduction against.

Depreciation:- the forgotten tax deduction

 

If you have been paying tax through your salary, then it is likely that this depreciation deduction will mean that you receive a tax refund.

So depreciation is a key way to increase the cash-flow of any residential property investment.

How does depreciation work? investment-property-depreciation how depreciation works

As we mentioned earlier, you are entitled to claim a deduction on the wear and tear on your investment property, but how is this calculated?

There are two types of depreciation allowances available: depreciation on Plant and Equipment, and depreciation on the Building.

Plant and Equipment or (Fixtures and fittings) refers to items within the building such as carpet, appliances (fridge, stove etc.), light fittings, furniture and the like.

Building Allowance refers to construction costs of the building itself, such as concrete and brickwork.

Both of these paper costs can be offset against your assessable income.

Does my property qualify for Depreciation?

If your residential property was built after July 1985 you will be able to claim both Building Allowance and Plant and Equipment. If construction on your property commenced prior to this date, you can only claim depreciation on Plant and Equipment. But it will still be worthwhile.

“If you would like a free “Guide to Maximising Property Depreciation Deductions”

Deductions are available for 40 years.

From the date construction was completed the Australian Taxation Office (ATO) has determined that any building eligible to claim capital works deductions has a maximum effective life of 40 years. Therefore, investors can generally claim up to 40 years of property depreciation on a brand new building, whereas the balance of the 40 year period from the construction completion date is claimable on an older property.

No property is too old.

An investment property does not have to be new. Both new and old properties will attract some depreciation deductions. One common myth is older properties will attract no claim. It is worth making an enquiry about any property, but by far the largest benefits exist with new properties

Previous tax returns can be adjusted when a property owner has not been claiming depreciation or maximising tax depreciation deductions. The previous two financial year tax returns can generally be adjusted and amended.  Talk with your accountant about how you can achieve this.

Lets look at an example of how this will work

The following example shows how property depreciation will increase the cash return on an investment property.

An investor owns a property purchased for $420,000 with a rental income of $490 per week resulting in a total income of $25,480 per annum. Expenses for the property such as interest, rates and management fees totalled to $32,000. Therefore the total deductible loss was $6,520.

The following scenario uses the above figures to show this investor’s cash flow with and without depreciation.

Scenario 1 – Without a depreciation claim:

Pre-Tax Cash flow

Tax deductable loss                        $6,520

(Income – Expenses)

Post-Tax Cash Flow (tax rate 38.5%)

Tax Refund                                             $2,510

(Deductable loss x 38.5%)

Net Cash Outlay                                  -$4010

Cash position per week                  -$79

 

Scenario 2 – Including an $11,500 depreciation claim:

Pre-Tax Cash flow 

Tax Depreciation                 $11,500

Tax deductible loss              $6,520

(Income – Expenses)

Total Deduction                  $18,020

Post-Tax Cash Flow (tax rate 38.5%)

Tax Refund                                         $6,937

(Deductable loss x 38.5%)

Net Cash Outlay                              +$417

(Initial loss + refund)

Cash position per week             +$8

 

By claiming depreciation this investor was able to turn their negative cash flow position, paying out $79 per week, to positive cash flow, earning $8 per week on the property. Claiming property depreciation saved this investor $4,427 for the year.

 

This difference of $87 per week is effectively an increase in the cash flow from the investment of this amount.  It is like getting an extra $87 per week rent.

How can I claim depreciation?

In order to claim these deductions, investors usually engage a specialist Quantity Surveyor to complete a Tax Depreciation Schedule. This schedule outlines the deductions available on their specific property and is used by the investor’s Accountant when preparing a tax return.

The preparation of a Tax Depreciation Schedule should always include a site inspection where the Quantity Surveyor will take detailed photos and notes documenting sufficient evidence to prepare the report. The report will include a value of each and every qualifying plant & equipment item within the property, the cost of construction at the time the building was built and a projection of the deductions claimable by the owner per financial year over 40 year period.

So do not be one of the estimated 80% of property investors that are failing to take full advantage of property depreciation and are missing out on thousands of dollars in savings.

Talk with us about your entitlement to claim your investment property tax deductions.

If you would like a free “Guide to Maximising Property Depreciation Deductions”

Geoff
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Geoff

Senior Client Adviser at Success In Property
With over 30 years experience in Finance, Financial Planning and Real Estate, Geoff is ideally suited to show you how to build your Property Investment portfolio.Call on 0409228554
Geoff
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