Working the figures

Here's a post I did a couple of days ago about a similar thing. Just substitute the numbers for your scenario:

"I'm no accountant, so don't take this as gospel, but from memory it sort of works like this;

Say you earn $100k and pay 48.5% tax on it (Yuk!!)

Your rent is added to your earned income, which then means you have a new taxable income to pay (more than you have already).
$100k + $20,500 = $120,500. You have already paid $48,500 in tax, the tax on the new taxable income is $58,442; you now owe an extra $9,942.

Now you subtract all the expenses for the I.P, and they are deducted at your marginal tax rate.
Total expenses (including Loan Interest and depreciation) = $27,000.
 
(I haven't added other expenses such as insurance, management, maintenance, rates – I assume they are in your $6k expenses figure? If not, add them to the other expenses. If you don't know the total, we can assume a conservative 10% of rent would be the amount).

So, new total expenses is = $29,700 (including 10% other expenses)

Deducted at your marginal rate of 48,5%, you can claim back = $14,404 ($29,700 @ 48.5%)

This is deducted from your new taxable income of  $125,500, which you still owe tax of $9,942.

Your tax return should be approx = $4,462.

There is a calculator in one of the Margaret Lomas books; she has 5 books now; read them all, and the calculator can help you guestimate this figure. Or, talk to your accountant for a more accurate figure, but I think what I said was about right.

I hope this helps"

I consider every dollar that comes back to me from the property as income. Every dollar that goes out is an expense and is tax deductible.
Depreciation, if it is only an 'on-paper' depreciation deduction in my book is income. The reason I say this is because the money comes back to me by way of tax return. This is money that I did not need to actually spend in order to get the tax deduction, therefore it is free money. I'm talking about the existing building, fittings and fixtures.
I don't intend to ever sell the properties, so I won't ever have to add it back onto the cap gain.

Another type of depreciation comes from having done some renovations, which you have had to physically pay dollars from your pocket first to complete. In this case, you have the renovation costs, which are an expense, and then you have the depreciation on those costs, which is, in effect, income.

In a similar context, it is like an electrician buying a new drill. The cost of the drill is an expense, and he gets to depreciate the cost through the tax return. He would normally have to pay tax on his income, but the depreciation on the drill saves him some of that tax. This is, in effect, income.

Consider the building on the property as the tool you use to create the income (rent) and the depreciation of that building is saving you tax, which is money back in your pocket (and not little Johnny's) – income.

The interest only payments are an expense, from which you will get some money back via tax refund at your marginal tax rate – income.

Money out; expense. Money in; income. A bit simplistic, but takes away the confusion.

Hi

Just to let you know when you earn $100,000 you are not charged the top tax rate for the whole 100,000. The 2007-08 rates are

1 – 6000   Nil tax
6001 – 30,000  15c
30,001 – 75,000  30c
75,001 – 150,000  40c

so I think if you calculate this out it comes to 27,000 tax on 100,000 plus your medicare levy.

I hope this helps, you can go into the ATO's website and do a quick calculation on your own tax.

Cheers