How to use depreciation to cut your tax bill

Are you looking for tax tips to save you money as the end of the financial year looms? You’d be well advised to take a good look at your depreciation allowances to make sure you’re claiming your full entitlements. You may be able to cut thousands from your tax bill, and even turn a negatively geared property into one that actually puts cash in your back pocket.

“Research shows that 80% of Property Investors are failing to take full advantage of property depreciation and are missing out on thousands of dollars in their pockets,” said BMT Tax Depreciation director Bradley Beer, who added that depreciation is often missed because it is a non-cash deduction – i.e. the Investor does not need to spend money to claim it.

So what can you claim?

Depreciation related to a building’s structure can be claimed via capital works allowance, explains Beer. Deductions are based on the historical cost of the structure. As a general rule, any residential building which commenced construction after 18 July 1985 is eligible for the capital works allowance.

Depreciation on plant and equipment, and fixtures and fittings can also be claimed. The depreciation deduction available on each item is calculated using the effective life set by the ATO. Some plant and equipment depreciable items commonly found within a property include hot water systems, carpets and blinds.

He offers the following example to demonstrate how property depreciation changes a typical investment scenario from being negatively geared to being cash flow to positive.

An investor has purchases a property for $420,000 and is receiving $490 per week in rent for a total income of $25,480 per annum. The estimated expenses for the property include interest, rates and management fees, which total $32,000 per year. The following scenario shows the investor’s cash flow with and without depreciation.

Depreciation Example Scenarios

In this example the investor uses property depreciation to go from a negative cash flow scenario, paying out $79 per week, to a positive cash flow scenario, earning $3 per week on the property. By claiming depreciation this investor will save $4,255 for the year, claims Beer.

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