Tax Depreciation Benefit
The tax depreciation benefit available to every property investor will vary. The following example has been provided as an approximate guide, using the diminishing value method of depreciation.
Property Assumptions
| Property | • two bedroom unit purchased for $400,000 | |
| Income | • rented for $385 per week
• total income of approximately $20,000 per year |
|
| Expenses | • interest only loan (7%) = $28,000 per year
• rates and management expenses = $4,000 per year • total expenses of $32,000 per year |
|
| Scenarios | No depreciation Claim | With Depreciation Claim |
| Pre-tax cash flow | • taxation loss $12,000 = $230 per week | • tax depreciation = $12,000
• cash flow position = -$12,000 • total deduction = $24,000 |
| Post-tax cash flow (top rate of 45%) | • tax refund = $5,400 | • tax refund = $10,800 |
| Net cash outlay | $6,600 = $126 per week | $1,200 = $23 per week |
This demonstrates the after tax effect of applying property depreciation. The property investor in this situation has a bottom line benefit of $5,400 per annum. This benefit is the difference between the $6,600 cost before depreciation is applied, and the $1,200 cost once depreciation is applied.??This profile emphases the benefit of depreciation. The property investor has made this saving from the same property that had moments ago cost $6,600 for the same period.
Source:
BMT & ASSOC Quantity Surveyors
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