23 May

Negative gearing and depreciation - is a depreciation report still relevant?

Capital Claims Tax  Depreciation are quantity surveyors and  investment property depreciation experts.  Learn more about how depreciation improves investor cash flow here.

6 facts every property investors should know about claiming depreciation

What is negative gearing?

Negative gearing allows for investors who have made a loss on an investment property to claim that loss against their personal income for that year.  As a result it lowers the the individual or entity's taxable income and therefore their tax payable.  This can mean a boosted tax refund (or a lower tax bill depending the circumstances) at the end of financial year. Learn more about negative gearing in general here.

How does depreciation factor in to a negative gearing strategy?

Capital allowances and depreciation are legitimate tax deductions claimable by investors to account for the ageing and wear and tear of their investment property over time (the loss in value of the building and assets as they age is claimable each year as a tax deduction). Depreciation is in fact one of the largest tax deductions claimed by owners of rental properties. Learn more about what tax depreciation is here.

Depreciation helps reduce tax payable when positively geared 

For a property that is positively geared, claiming for depreciation helps to reduce the profit made on the investment in a year, which means less tax is payable.  Any change to negative gearing law will not change the ability of these investors to claim for depreciation and to reduce their tax liability.

Depreciation improves tax position when negatively geared

For property that is negatively geared, claiming for depreciation further increases the loss made by the investment property.  This greater loss is claimed as a legitimate tax deduction against personal income, and further decreases the investor's tax liability, or boosts a tax refund.

The following tables show how claiming for depreciation affect the cash flow position of a property and the tax payable for an investor.

How claiming depreciation affects cash flow for a negatively geared property

This property generates a rental income of $455.00 per week.  The "No Depreciation" column shows the cash flow position if no depreciation is claimed - it is making a loss of $2,840.00 per annum, which for this investor means a tax refund of $923.00.  The property is still cash flow negative $159.75 every month.

When claiming depreciation, the paper loss is increased to $15,852.00 per annum.  The tax refund is boosted to $5,151.90, and the property is now cash flow positive $192.66 every month - a turnaround of $352.40 every month!

Table 1 for handbook tax depreciation

How do you claim depreciation in your tax return to the ATO?

An accountant will use your depreciation schedule to apply your depreciation deductions when submitting your tax return to the ATO.  Depreciation is claimed under the property-related expenses area of a tax return.  You can see from the table below, that additional cash to this investor for claiming depreciation is $5,079.  A depreciation schedule is one-off fee that is 100% tax deductible and forecasts a full 40-years of depreciation deductions.




So, regardless of whether your investment property is positively or negatively geared, you still benefit from having a depreciation schedule

As the above tables show, regardless of whether your property is making a loss or a profit each year, investors will still boost cash flow by claiming for depreciation.  To maximise the depreciation deductions for your property, engage the services of a specialist quantity surveyor, who is also a registered tax agent.

Not all quantity surveyors are depreciation specialists, and a depreciation specialist must be registered with the Tax Practitioners Board to provide depreciation schedules for tax purposes.

If you own an investment property, the best way to ensure your depreciation deductions have been maximised is to use a depreciation schedule prepared by Capital Claims Tax Depreciation. For an estimate of deductions you may be entitled to, or to have your current depreciation schedule reviewed free of charge, please don't hesitate to get in touch.

Related articles:

Can investors claim depreciation on second-hand properties since the legislation change in May 2017

I purchased a second-hand property, what can I claim?

Can I still claim depreciation on my investment property since the new legislation passed? 


click to estimate tax depreciation deductions for rental property

About Mark Wilkins

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

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