Calculate depreciation deductions before purchasing your next property
Investors often question the ongoing costs associated with a potential purchase.
When considering the purchase it is important to ensure there will be a maximum cash return.
There’s a myriad of expert advice available and every investor has their list of essential property inclusions.
Astute investors consider the potential rental return of the property, the property’s location in proximity to local services and facilities, local employment drivers and historical growth of properties within the area.
Meanwhile, other investors limit their options by only looking at properties within close proximity to their home.
To get a true calculation of a property’s ongoing cost, investors should calculate the tax deductible costs and other deductions available, such as property management fees, rates, interest, repairs and maintenance and property depreciation.
The amount of depreciation available varies significantly from property to property and can be difficult to estimate.
These deductions add to the investor’s net cash return and every deductible dollar is returned to the owner at their marginal tax rate.
For this reason, investors often fail to consider the financial benefit of claiming depreciation prior to making their purchase.
By incorporating depreciation calculations prior to making a purchase, an investor may find the property to be more affordable.
Vanessa and Greg have been looking to buy a townhouse as an investment.
A property they have recently seen listed, a two bedroom townhouse on offer for $495,650, is in great proximity to schools, shops, public transport and a park.
Before making an offer, Vanessa and Greg have completed some preliminary research by asking their Property Manager for a rental appraisal of the property.
This appraisal found the property to have an expected rental income of $505 per week, or $26,260 per annum.
Vanessa and Greg also estimated the costs involved in owning the property should they decide to go ahead with the purchase.
These costs totalled $35,639 and included interest, property management fees, rates, repairs and maintenance.
Vanessa and Greg were aware that once the property became income producing they would be entitled to claim depreciation deductions for both the building structure and the plant and equipment assets.
They contacted a Quantity Surveyor for a depreciation estimate, who found that they would be able to claim approximately $9,500 in depreciation deductions in the first full year.
This example shows how including depreciation in the calculations prior to making a purchase can really assist the buyer in making an informed decision.
Without depreciation, the property investor would experience a loss of $114 per week during the first year of owning the property.
By claiming depreciation, this cost is reduced to $46, saving them $68 per week or $3,536 in the first year of ownership.
Once an investor has made their purchase and the property becomes income producing, the income earned from depreciation can make a big difference to the owner’s cash flow.