OK – This is harder than to get your head around. Say that you have an investment property and you spend more than you make on it (negatively geared).
What if you could claim extra large tax deductions that you didn’t pay cash for – and then get a bigger tax refund than the loss you made. Then the property would have Positive Cashflow – that is you have more cash each year after buying the property.
TIP: If you own an investment property particularly if built after 1985 – it is wise to get a depreciation specialist to prepare a quantity surveyors report (more below) – to tell you how much depreciation you can claim each year.
What are these extra tax deductions?
Depreciation is claiming deductions for something over its useful life. If you buy an apartment – you might be able to claim part of the value of the building or other items (see bottom for more detailed explanation).
How do you get these extra tax deductions?
1. Buy a property built after September 1985.
2. Buy a quantity surveyors report (more below) – you will get a report where you are given the amount of capital allowances and capital works, etc. you can claim each year.
How does it work?
Example 3: Same figures as Example 1 except you get an extra $15,000 depreciation expense from the quantity surveyors report (the unit you bought was a new-ish development).
Lets say you buy a 1 bedroom unit in Sydney for $300,000. It is rented at $300 per week ($15,600 a year)
You have 10% deposit of $30,000 and you borrow 90% (interest only loan 270k @ 6.5% – OK I reduced the interest by 0.5% to make the example work!). You would pay $18,900 $17,550 interest. (which is higher than the rent!)
You would also have to pay expenses – council rates, strata rates, water rates, (and other bits and pieces you might have) – say $4,000.
So your old net tax loss is $5,950 (refund of $2k). But adding depreciation expenses above $15,000 makes a tax loss of $20.950. Your tax refund at 30% will be $6,285. However the $15,000 depreciation expenses aren’t amounts you have actually paid – so if your tax refund of $6,285 is more than your old loss of $5,950 by $335.
And boom. Positive Cashflow explodes. You now have an extra $335 cash for the year. (its not huge but making money each year while the property can increase in value isn’t too bad!). In future years the depreciation claims might go down but rent received should go up.
That is it in a nutshell (see below for extra info).
Quantity Surveyors Report
Ok – while your accountant can provide a useful life for the carpet, water heater, or different parts of the kitchen renovation you paid for – they CAN’T estimate the value of the building, pipes, joint assets in an apartment building or other things that you can claim.
You need to hire a quantity surveyor to make an individual property report for your property.
http://www.depreciator.com.au– is one there are many others around Australia. Charges depend on the property but would be approx $600-$1,000.
If you are interested to know a little bit more about depreciation and how it works – read on. There are two categories of depreciation:
1. Building Depreciation (called Capital Works deductions). If the property you bought was built after 1985 -you can claim 2.5% a year of the building cost (over 40 years this makes 100% -i.e. if you bought a property built in 1985 this will run out in 2025).
2. Items Depreciation (called Capital Allowances deductions). If you buy a water heater, carpet, blinds, etc. these items can’t be claimed immediately but have to be claimed over the life of the asset (provided by the tax office or estimated by you/accountant).
Example: A water heater would last for 8 years per the tax office. So if you buy it on the 15th June – then you can claim 15 days of depreciation the first year, 365 days the next year, until you have claimed 100% or throw it out (then you can claim the balance).