Most property investors know the standard expenses they can claim as tax deductions each year. The most common tax deductions include:
Interest on your investment loan;
Property management fees;
Repairs and property maintenance;
An often overlooked deduction is depreciation. Often referred to as capital allowance or tax depreciation, this is a deduction for the ageing and wearing out of your building and assets over time.
Depreciation is typically one of the largest tax deductions claimed by property investors.
Annual deductions are thousands of dollars every year.
If you are not using a Depreciation Schedule to claim the maximum tax deductions you are allowed, you are likely to be missing out on thousands of dollars in additional cash flow every year.
We'll show you how it works below...
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:
Most often, investors simply claim depreciation as a tax deduction at the end of the financial year, along with all of their other deductions.
Because depreciation is a calculated value (you won't have invoices or receipts), you will need a quantity surveyor to prepare a depreciation schedule for you.
The great news is, this is a one-off expense (it reports your deductions every year for up to 40 years), and is 100% tax deductible.
If you have owned your investment property for a few years and have not claimed any depreciation in previous years, you can potentially back-claim for those years and get a bumper return this year!
Learn more about depreciation for your investment property with our free eBook download!
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