Have you claimed depreciation on your investment property?

Claiming depreciation will assist an investor’s cash-flow

Properties that generate income for their owner will make the owner eligible for significant taxation benefits.

Of all the tax deductions available to property investors, depreciation is most often missed because it is a non-cash deduction – the investor does not need to spend money to claim it.

“Research shows that 80% of property investors are failing to take advantage of property depreciation and are missing out on thousands of dollars in their pockets,” said Bradley Beer, Managing Director of BMT Tax Depreciation.

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.

Claiming depreciation on an investment property can make a big difference to an investor’s cash-flow.

In order to claim these deductions, investors are encouraged to enlist a specialist Quantity Surveyor to complete a tax depreciation schedule.

This schedule outlines the deductions available on specific property and is used by the investor’s Accountant when preparing a tax return.

 Both new and old properties have the potential to attract significant depreciation benefits for the owner to claim as a tax credit. Property owners are also able to go back and claim missed deductions on previous financial year’s tax returns.

For an investor experiencing negative cash-flow on their property, depreciation can be the key to turning their situation into a more positive scenario.

The following is an example of an investor turning a negative cash flow position into a positive one:

An investor who owns a property purchased at $420,000 with a rental income of $490 per week with a total income of $25,480 per annum; had expenses for the property such as interest, rates and management fees totalling to $32,000.

By claiming depreciation, the investor was able to turn their negative cash-flow position into a positive one, saving them $4,255 for the year.

The following scenario shows this investor’s cash-flow with and without depreciation.

Property purchased for $420,000

Scenario without depreciation claim

Scenario with depreciation claim of $11,500

Annual expenses

$32,000

Annual expenses

$32,000

Annual income ($470 x 52 weeks)

$25,480

Annual income ($470 x 52 weeks)

$25,480

Taxation loss (income – expenses)

-$6,520

Pre tax cash flow (income – expenses)

-$6,520

Total taxation loss

-$6,520

Total taxation loss (pre-tax cash flow & depreciation)

-$18,020

Tax refund (Tax loss x tax rate of 37%)

$2,412

Tax refund (tax rate of 37%)

$6,667

Annual costs of the investment property (pre tax cash flow + tax refund)

-$4,108

Annual cash flow of the investment property (pre-tax cash flow + tax refund)

$147

Weekly cost of the investment property

-$79

Weekly cash flow of the investment property

$3

Difference of $82 per week

The depreciation estimates in this scenario were calculated using the diminishing value method of depreciation. 

This investor used property depreciation to turn their negative cash-flow position into a positive one. Without depreciation they were paying out $79 per week. By taking advantage of tax legislation and making a depreciation claim, the investor was able to turn their loss to an income of $3 per week. In total, this investor saved a total of $4,255 in just one year.

Ensuring that each depreciation claim is maximised on any building requires a combination of construction costing skills and thorough knowledge of current tax depreciation legislation. For this reason, it is recommended that investment property owners consult a specialist Quantity Surveyor to prepare a depreciation schedule prior to lodging their tax return.

Happy Investing!  Demelza

Please contact me on 0408 220 085 for details of suitably qualified professionals to assist you in relation the material in this blog.

Information and Data supplied by BMT.