Right now cash flow is front of mind for so many landlords. With the economy in decline, maximising cash flow from your investment property (without impacting your tenants) is more important than ever.
Claiming maximum deductions for depreciation is the simplest way to increase the cash return on your investment property.
Investment property depreciation is the ageing and wearing out of a property and it's assets over time.
When you claim for depreciation, you are claiming a tax deduction for the loss in value of those assets as they age and wear out.
Depreciation is typically one of the largest tax deductions available to investors every year, and has the potential to improve rental property cash flow by thousands of dollars each year.
You claim for depreciation using a depreciation schedule prepared by a quantity surveyor.
Understanding the impact of depreciation on cash flow is important for investors.
In the following example, where no depreciation is claimed, the cash-flow position of the property is negative $159.75 per month, or $1,917.00 per annum. This means the investor has to find $159.75 per month to make up the shortfall between the income generated by the investment property and the expenses incurred.
By claiming depreciation, the post-tax cash flow of the property becomes positive $192.66 per month, or $2,311.90 per annum. Remember, this is post-tax, meaning the investor is better off $352.40 net, every month.
Effect of claiming depreciation on the cash-flow position of an investment property:
Depreciation is claimable as a tax deduction in your tax return each year. You claim for it in the same way you claim for insurances, property management fees, repairs and maintenance etc.
The key difference from other claimable expenses is that depreciation is a calculated deduction. This means that how much you can claim for depreciation is calculated using a formula. Calculations are based on the construction cost of your building (Division 43), and the asset values and effective lives of all the assets in your property (Division 40).
Claiming depreciation is very easy. A quantity surveyor will calculate the depreciation you can claim annually and report it in your depreciation schedule. A depreciation schedule is a one-off purchase that details all the deductions going forward for the remainder of your property's life.
Simply give your depreciation schedule to your accountant when you do your taxes each year. If you do your own taxes, you can use the figures reported and enter where appropriate in the ATO tool.
Still unsure about claiming depreciation for your rental property?
Get a free, personalised estimate of the deductions you could be claiming from our expert team. Simply click the link below and provide a few details to allow us to do a quick, no obligation desktop assessment of your property. You have nothing to lose and possibly thousands of dollars to gain. You can also contact our team with any questions on 1300 922 220.
Mark is an expert quantity surveyor, business owner, public speaker and property developer. With 20+ years experience in the construction and quantity surveying industry Mark’s specialist expertise have been sought in consultant capacity by professional bodies such as the National Institute of Accountants and the National Tax and Accountants Association, and he has presented at various property and tax seminars and expos nationwide. Mark holds a Bachelor of Construction Management from the University of Newcastle, is an affiliate member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent.View all posts by Mark Wilkins