Investing in property is often associated with capital growth, but there’s another powerful way to boost your returns: depreciation. At Buyers Agency Australia, we want to help you maximise your property investment by leveraging every tool at your disposal. Here’s how depreciation can save you thousands on your taxes and improve your investment strategy.
What is Depreciation for Investment Properties?
Depreciation is the decrease in value of an asset over time due to wear and tear or deterioration. Just like a new car loses value as soon as you drive it off the lot, the building structure and certain fixtures within a property also depreciate. While the land component of a property typically appreciates, the value of the structure and fittings decreases. The Australian Taxation Office (ATO) allows investors to deduct this depreciation from their taxable income, providing substantial tax savings.
Is Depreciation on Investment Property Beneficial?
Yes, depreciation on investment property can significantly enhance your financial returns. If the value of your property decreases by $10,000, you can deduct this amount from your taxable income. For instance, if you earn $100,000 annually, you would only pay taxes on $90,000 after accounting for the depreciation. This deduction reduces your overall tax liability and improves your cash flow.
What is a Depreciable Property Used in an Investment Activity?
A depreciable property is an asset that is used in an income-producing activity, such as rental properties. The building structure, fittings, and fixtures within an investment property are subject to depreciation. This includes items like carpets, kitchen appliances, and even the building itself. By claiming depreciation on these assets, you can offset the income generated from your investment properties, reducing your taxable income.
How Can Investors Use Depreciation When Valuing Assets?
Depreciation can be complex, which is why it’s crucial to engage a quantity surveyor to create a depreciation schedule. This schedule outlines how much you can deduct each year. It’s important to remember that not all assets depreciate at the same rate. For example, carpets wear out faster than the building structure. By breaking down these components, you can maximise your deductions, especially in the initial years of ownership.
Are You Missing Out on Hidden Property Market Gems?
The Depreciation Hack: Maximising Your Tax Deductions
Analysis from BMT Tax Depreciation reveals that in the first year, investors can claim an average of $9,000. This means if your income is $100,000, you only pay tax on $91,000 after depreciation. This is in addition to other negative gearing benefits, making depreciation an incredibly powerful tool for property investors.
Key Steps to Maximise Your Depreciation Benefits
- Invest in Properties with High Depreciable Assets: Newer properties or those with substantial fixtures can offer higher depreciation benefits.
- Regularly Update Your Schedule: As properties age and you make improvements, updating your depreciation schedule ensures you maximise your deductions.
- Consult with Experts: At Buyers Agency Australia, our Property Investment Advisors can guide you through the intricacies of depreciation, ensuring you fully leverage this powerful tool.
The Cost of a Depreciation Schedule
Creating a depreciation schedule costs around $700, but it’s well worth the investment. This schedule can pay for itself many times over the asset’s life by maximising your tax deductions.
Should You Buy Property Just for Depreciation Benefits?
While you shouldn’t purchase a property solely for depreciation benefits, leveraging them can save you tens of thousands over time. Focus on acquiring high-quality investment properties with substantial depreciable assets to maximise your returns.
Depreciation is a powerful tool that can significantly enhance your property investment strategy. By understanding and leveraging depreciation, you can save thousands on your taxes and improve your overall returns. At Buyers Agency Australia, we’re here to help you navigate the complexities of property investment and maximise your financial success.
Ready to explore how depreciation can boost your investment returns? Book a free 15-minute discovery call with Dragan Dimovski to discuss your financial goals and how to strategically use depreciation and other tools to achieve them.
