… when they claim depreciation deductions
Owners of income-producing properties are eligible for significant taxation benefits and yet some of the perks continue to fly under the radar.
Research shows 80% of property investors don’t take full advantage of property depreciation and miss out on thousands of dollars in their pockets.
On average, property investors can claim between $5,000 and $10,000 in depreciation deductions in the first financial year. Despite this, depreciation is often missed because it is a non-cash deduction and an investor doesn’t need to spend money to claim it.
As a building gets older, items wear out – they depreciate
The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a tax deduction. Depreciation usually comprises two classes:
- A capital works allowance for the structure of the building and any fixed assets (such as walls, floors, roofs, tiling and cabinetry)
- Plant and equipment deductions for removable assets (such as appliances, floor coverings, curtains and blinds and light fixtures).
The below example shows how depreciation claims are calculated, the difference these claims can make and how claiming these deductions helps improve your clients’ cash flow.
Depreciation: an investor profile
An investor purchased a property for $420,000 and receives $490 per week in rent for a total income of $25,480 per annum.
The estimated expenses for the property include interest, rates and management fees, which total $32,000 per annum.
The following scenario shows the investor’s cash flow with and without depreciation. A new two bedroom unit typically will depreciate by around $11,500 in the first full financial year.
Property Purchased for $420,000
| Scenario without depreciation claim |
|
| Annual expenses | $32,000 |
| Annual income ($490 * 52 weeks) |
$25,480 |
| Taxation loss (income – expenses) |
-$6,520 |
| Total taxation loss | -$6,520 |
| Tax refund (total tax loss * tax rate of 37%) | $2,412 |
| Annual costs of the investment property (pre tax cash flow + refund) | -$4,108 |
| Cash outlay per week |
-$79 |
| Scenario with depreciation claim of $11,500 |
|
| Annual expenses | $32,000 |
| Annual income ($490 * 52 weeks) |
$25,480 |
| Pre tax cash flow (income – expenses) |
-$6,520 |
| Total taxation loss | -$18,020 |
| Tax refund (total tax loss * tax rate of 37%) | $6,667 |
| Annual cash flow of the investment property (pre tax cash flow + refund) | $147 |
| Weekly cash flow of the investment property | $3 |
Depreciation difference = $82 per week
The depreciation estimates in this example were calculated using the diminishing value method of depreciation
In this example, the investor uses property depreciation to go from a negative cash flow scenario, paying $79 per week, to a positive cash flow scenario. By claiming depreciation this investor will save $4,255 for the year.
For more information about the resources BMT can provide to assist you, download the RealTeam app and scroll down to Tax Services. Ask for the RealTeam Corporate Discount.
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
