Want more money in your pocket? Depreciation could be the answer
Certain ‘assets’ (see list below) in your rental property will diminish in value each year due to wear and tear, or by becoming out of date. The reduction in value of these items is known as ‘depreciation’. Each year a property investor can calculate how much these items have depreciated and deduct it as an expense for that property, which reduces the profitability of that rental property and reduces taxable income.
Here are some common items that an investor can claim depreciation on:
- Heat pumps
- Hot water cylinders
- Retaining walls
If you’ve made it this far, then great. Because here comes the most important fact about depreciation :)
Depreciation is a non-cash expense.
You are not physically handing over any money. It is a ‘paper’ expense only. This point is crucial, and explains why depreciation improves cashflow.
All investment properties have some depreciating assets, but recently built or recently renovated houses will have the most depreciation to claim. As an example, we recently had an investor build a new 4 bedroom home on a vacant section. Total build cost was $410k. Out of that $410k build cost, $73k was for depreciating assets like the ones listed above. Going forward, a portion of that $73k will be claimed annually as an expense against that property, hence reducing taxable income and increasing cashflow.
To begin claiming depreciation you will need to engage a property depreciation specialist who will go through your property and provide a report on what can be claimed, which you pass onto your accountant. The cost of this report will be around $400, which is not much when you consider how much you will be saving on your tax bill for years to come. In most cases you will save more than $400 in your first tax bill as a result.