Property depreciation is the key to turning your property from a cash flow negative scenario to a cash flow positive scenario
Properties that generate income for the owner are eligible to significant taxation benefits. Research shows that 80 per cent of property investors are failing to take full advantage of property depreciation and are therefore missing out on thousands of dollars in their pockets. Depreciation is often overlooked because it is a non-cash deduction – the investor does not need to spend the 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 deduction.
Both new and old properties have the potential to attract significant depreciation benefits for the owner to claim as a tax credit. It is worth having an expert look into any scenario to determine if a property will attract depreciation.
Property owners are able to go back and claim missed deductions on previous financial year’s tax returns. The ATO permits two previous years tax returns to be amended, often resulting in the ATO paying money back to the owner!
Ensuring that each depreciation claim is maximised on any building requires a combination of construction costing skills and thorough knowledge of tax depreciation legislation. This rare combination of skills has resulted in a limited number of quantity surveying firms specialising in property depreciation. Quantity Surveyors are recognised by the ATO as being appropriately qualified to estimate building costs for the purpose of depreciation. Your Accountant should recommend a specialist to complete such a report to maximise the depreciation benefits from your property.
Depreciation: an investor profile
Below is a basic property scenario to demonstrate the cash flow difference depreciation can make to a property investor. Whilst the depreciation benefit to every investor will vary, the majority of property investors fall into the 37 per cent tax bracket (salaries between $80,000 and $180,000), and the following scenario is based on these circumstances.
An investor has purchased a property for $420,000 and is receiving $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 typical $420,000 unit will depreciate around $11,500 in the first full financial year.
In this scenario the investor uses property depreciation to go from a cash flow negative scenario, paying out $79 per week, to a cash flow positive scenario, earning $3 per week on the property. By claiming depreciation this Investor will save $4,255 for the year.
To calculate the estimated deductions available on your investment property you can visit BMT Tax Depreciation’s Tax Depreciation Calculator. Or for obligation free advice about an investment property scenario contact our expert team on 1300 728 726.