What is Depreciation?
Depreciation is a term that describes the decreasing value of an asset over time. If that asset is used to earn an income then depreciation may be claimed as a tax deduction. A Tax Depreciation Schedule is a report which outlines the depreciation allowances that an investor is entitled to.
The Income Tax Assessment Act 1997 allows owners of investment properties to claim annual deductions for depreciation on:
- The main building and structural improvements. This generally applies to residential properties built post 1985 and for renovations additions etc built post 1985.
- Plant and equipment items (light fittings, floor coverings, kitchen appliances, hot water system….the list goes on and on) This is available on all properties regardless of age.
Why Have a Depreciation Schedule Prepared?
Have a look at the simple example to the right and see one property investor misses out on over $26,000 in depreciation deductions compared to the other. Both have identical properties, are on the same income, receiving the same rent, and on the same interest rate.AVERAGE PROPERTY INVESTOR |
ASTUTE PROPERTY INVESTOR |
|||
|
YR 1 |
YR2 |
YR 1 |
YR 2 |
Gross Income |
$70,000 |
$70,000 |
$70,000 |
$70,000 |
Rent Received |
$20,800 |
$20,800 |
$20,800 |
$20,800 |
Interest Paid |
$25,000 |
$25,000 |
$25,000 |
$25,000 |
Depreciation Claimed |
Not Claimed |
Not Claimed |
$14,000 |
$12,500 |
Taxable Income |
$65,800 |
$65,800 |
$51,800 |
$53,300 |
Income Tax Payable |
$14,340 |
$14,340 |
$10,917 |
$11,389 |
Savings |
ZERO |
ZERO |
$3,423 |
$2,950 |
This simplified example shows the astute property investor saved $6373 in the first two years alone. That's money in YOUR pocket!