When we think about property, most people focus on the growth side but there is a whole other way property can make you money.
Depreciation is often overlooked by property investors, but it can be a really powerful way to save a significant amount of money every year on your taxes.
The way depreciation works is that it assumes that the value of an asset decreases over time due to wear and tear or deterioration.
Think about it like a new car. Over time, that car depreciates in value.
The same thing happens in real estate; the building structure and certain fixtures within the property will wear out and therefore go down in value.
What’s important to note here as well is that it is the land component of a property that is typically rising.
So investors have these two forces at play, where land is rising but the value of the structure and fittings is falling. What’s even better is that the ATO allows you to deduct the depreciation.
If the value of the property decreases by $10,000, then you can take that off your taxable income.
However, depreciation can be a very complicated topic, which is why when you purchase a property, it’s important to reach out to a quantity surveyor and order a depreciation schedule. This will determine how much you are able to deduct each year until that asset is considered fully deducted in the eyes of the tax man.
The real hack when it comes to depreciation is that not everything falls in value at the same rate.
For example, the carpets in your house will wear out a lot faster than the structure itself. In fact, when you break down all the different components of a house, you can often find that you can deduct quite a bit in your first year.
Analysis from BMT, who looked at all of their depreciation reports that they’d done for clients, found that in the first year, clients were able to claim $9,000 on average.
What that means is that if you have an income of $100,000, then you can deduct this $9,000 and you will only end up paying tax on the remaining $91,000. That’s before you also factor in all the other negative gearing benefits.
As you can see, depreciation is incredibly powerful, and the fact that you don’t need to spend that money to claim the deduction is something that all investors should be looking at.
It will cost you around $700 to get a depreciation schedule made up, but it’s well worth the cost and will pay for itself many times over the life of the asset.
You probably don’t want to go out and buy an asset just for the deprecation benefits. You also wouldn’t want to buy a property trying to maximise deprecation because that would probably be a home that has a large structural element to it like an off-the-plan apartment.
But be sure to take advantage of it when you can as it will save you tens of thousands.
