Did you know you could improve the cash flow available from an income producing property simply by claiming property depreciation?
Many property investors are currently unaware that Australian Taxation Office (ATO) legislation permits them to claim depreciation from their investment property.
So what is depreciation and what difference could the deductions from depreciation mean for you?
Essentially, there are two types of property depreciation the ATO legislation allows property investors to claim.
A capital works deduction for the wear and tear of the structural element of the building (including fixed irremovable assets) and depreciation deductions for the mechanical or removable plant and equipment assets contained within the property.
Unlike other deductions where you need to outlay money in order to make a claim, depreciation is considered to be a non-cash deduction.
For investors, depreciation deductions can make a real difference to reducing your taxable income and also make a property cash flow positive sooner.
The average first year residential property depreciation claim sees investors receiving between $5,000 and $10,000 in deductions.
This is no small amount, and the difference a depreciation claim could make should never be underestimated.
The ATO does restrict the owners of older properties from claiming capital works deductions based on the construction date of their property, however both new and older property owners can benefit from depreciation deductions.
This is because plant and equipment asset are not limited by their age.
It is the condition and quantity of these items which contributes to their depreciable amount.
Plant and equipment items such as carpets, hot water systems, as well as less obvious items such as bins and door closers often represent a significant portion of the construction costs of a residential property.
These items can therefore result in substantial depreciation deductions for the property owner.
Recent renovations also entitle owners to claim capital works deductions. Even if work was done by a previous owner, the current owner is entitled to claim capital works deductions for structural improvements as well as plant and equipment depreciation for new assets installed in the property.
Justin purchased an investment property for $610,000.
Justin’s property was earning a rental income of $550 per week with a total income of $28,600 per annum.
Expenses for Justin’s property, including interest rates and management fees, totalled to $41,028.
This meant that Justin was currently experiencing an annual after tax outlay of $7,830 or a loss of $151 per week from the property.
The table below provides a summary of the Justin’s scenario before and after depreciation was claimed.
By claiming depreciation, Justin’s annual outlay from the property was reduced to $2,465 per annum or $47 per week.
This made a difference of $104 per week or $5,405 to Justin’s available cash flow for that financial year.