Investing in real estate comes with big tax advantages. The ability to use depreciation rules on real estate assets can dramatically reduce an investor’s taxable income. Understanding and legally claiming depreciation on that asset, can increase your cash flow and assist to reduce your holding costs each year, which may enable you to invest in more property and grow your asset base. In many cases, it can even eliminate income taxes entirely.
Like any tax benefits, these can change or be taken away at any time, so you should always run your numbers using before tax numbers, rather than focusing on any potential tax benefits available to you through benefits such as depreciation. It’s important to have an accountant to run these deductions for you as an investor.
In simple terms, depreciation is essentially a tax deduction available to property investors. Your investment property earns an income (in the form of rent from your tenants), so – as with any activity that produces an income – there are various tax deductions available to you.
When it comes to investing in property, the ATO allows you to reduce your taxable income by claiming the cost of maintaining your asset. Such as property management fees, council rates, and other miscellaneous items. You pay an amount of money, you receive a tax invoice and receipt, and you use that piece of paper to claim a tax deduction when tax time comes around.
However, property depreciation is a ‘non-cash deduction’ – which means you don’t physically hand over cash in order to claim a deduction. Depreciation allows you to claim a tax deduction for the wear and tear on an investment property over time. It’s not just this that we can claim
Not all expenses related to owning a property are allowed as deductions, so it’s important to check what you can claim. Deductible expenses for the property are different for residential and commercial properties.
Claiming all of the available tax deductions not only helps you maximise your cash flow but can also make building your property portfolio easier. The tax depreciation deduction along with the other available tax deductions will help reduce your tax payable and keep you financially secure. Depreciation is an incurred expense that any property investor will be subject to and is, therefore, a genuine deduction that should be taken advantage of.
Unfortunately, many investors, miss out on claiming the tax depreciation deduction. Maybe they didn’t know about it, they were confused as to their eligibility for it, or worst of all, they were told they couldn’t claim it by their accountant. The lack of understanding around depreciation results in many thousands of Australian property investors paying more tax than they should.
So, if you’re new to the world of property investment and are hoping to build your portfolio, taking advantage of making the most of depreciation legislation when it comes to tax time can help you to grow it more quickly.
You have two choices when claiming this tax allowance.
Prime cost method or straight-line method
This gives you an equal tax deduction each year over the useful life of the item.
How to calculate your depreciation:
The Australian Tax Office (ATO) offers property investors the opportunity to claim the depreciating assets as a tax deduction, as long as the property is being used to generate an income.
There are two types of depreciation deductions available for property investors to claim:
According to the ATO, the effective life of a depreciating asset is how long it can be used to produce an income. For example, a carpet, subject to a fair amount of wear and tear, has an effective eight-year life
Investing in rental properties, depreciation can be a valuable tool, because it allows you to spread out the cost of buying the property over decades, thereby reducing each year’s tax bill and still enabling you to gain from its continuous cash flow. Of course, if your property depreciates and then sells it for more than its depreciated value, you’ll owe tax on that gain through the depreciation recapture tax. Depreciation can save you a lot of money on your taxes. It’s a complicated process, but figuring it out for your rental properties is worth the time it takes.
Because property tax laws are complicated and change periodically, it’s always recommended that you work with a qualified tax accountant when establishing, operating, and selling your rental property business. That way, you can be sure to receive the most favorable tax treatment and avoid any surprises at tax time.
Make the most in your property depreciation investment – reach out to the One Central Property team and we can arrange for a FREE 1-on-1 Strategy Session to map out your goals. One Central Property will be with you at every step to achieve your goal. Speak with a dedicated property consultant today and discover how our experts help guide you through all those obstacles that you’ll face during your property journey.
Please note that information provided in this blog/webpage are general information only that is subject to change without notice and should not be relied on as a substitute for legal, financial, real estate or other expert advice. One Central Property Pty Ltd disclaims all liability and responsibility, including for negligence, for any direct or indirect loss or damage suffered by any person arising out of any use of this document or any information or material available from it.