Depreciation- Property Investors Best Friend

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The most important thing to a Residential property investor is cash flow. The investor requires a return to fund the holding costs of the property. Over its lifetime things like repairs and maintenance, council rates, water rates, strata levies, management cost to agents, and the big one being borrowing costs on the monthly loan repayment are included.

The obvious return to the investor comes from the tenant in the form of rent but the next biggest return comes from the Australian Tax office in the form of negative gearing benefits. Negative gearing is where the income being rent received by the tenant is not enough to cover the outgoings which creates a loss situation. This loss is then offset against your other income which means that you will be refunded a portion of the tax you have paid in your normal course of employment.

But what if the ATO gave you a refund for something you hadn’t even paid for? Well they do, when you claim depreciation.

When you purchase a property, the price includes fixtures and fittings, carpets, kitchen, stoves, air-conditioning, blinds, curtains, etc. all of which the investor can depreciate. If the building is new enough you may be entitled to claim depreciation of the actual building itself called “Building Allowance” (Note: Residential Property Built 18/July 1985 to 15th September 1987 rate is 4%, Property Built post 15th September rate is 2.5%). We always recommend that you contact a quantity surveyor to provide you with depreciation reports, this should only cost a few hundred dollars. This report should be handed to your accountant at tax time as it sets out what you can depreciate and the amounts you can include in your tax return over the life time of ownership for your property.

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How much refund would I receive for depreciation?

Let’s make a few assumptions by way of examples, first let’s assume a tax rate of 34.5% including medicare levy and let’s assume your property purchase price was $700,000. That it was a new property built post 15th September 1987 and the quantity surveyor has given you a depreciation report stating that all fixtures, fittings, etc. amount to $30,000 and the building component was $300,000, therefore $50,000 @ 5% = $2,500 (this is an estimate for each item would vary upward or downward but by way of example) $300,000 @ 2.5% pa = $7,500.

Let’s say you are entitle to claim $10,000 against your other income, you will receive a further refund of 34.5% (which is the tax you have paid on your other income) = $3,450.

That’s $3,450 to assist you with the holding costs of your investment property, and better still you don’t have to wait till the end of the year to get this refund. You can claim this each pay day via a PAYG variation lodged with your employer and the Australian Taxation Office.

One point that you need to be aware of is that if or when you sell the property the ATO will add back the depreciation for Capital gains tax calculations, which basically means you cannot receive a double benefit if you have claimed depreciation over the lifetime of the property.

David Naylor

Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

One response to “Depreciation- Property Investors Best Friend”

  1. Sandra says:

    Hi David we have investment properties, however our tax bill is very low or nil as maintenance etc… balances it out. I have tried to get my husband to get a depreciation schedule done but cost is an issue to have it done. $600 each ? Question does this have to be done every year ? how much would it cost per year ? our friends also have several investment properties and I have suggested they get depreciation schedule for their new property but their accountant said it is not necessary ? they are paying a lot of tax every year.
    I enjoy listening to Bradley Beers on “Your Money Your Call “when I can his advice is excellent. Another question relates to Capital Gains Tax if you have a holiday property not rented out ever when you sell do you pay capital gains tax ? how would it work please ?
    If I bought a property in 1991 @ say $120,000 now worth $460,000 had been rented out for 25 years have all receipts how would CGT be worked out ?

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