In Economics & Finance, Property Investment

… 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.

Investors saving $82 per week house

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:

  1. A capital works allowance for the structure of the building and any fixed assets (such as walls, floors, roofs, tiling and cabinetry)
  2. 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.

Recent Posts
Paperless Real Estate Transactions