This is my first foray into the forum, after reading Steve’s book recently. About the only piece of advice I could’nt agree with is in regards to depreciation. Admittedly Steve only really touched on the subject, however I have a fair degree of experience in this field, owning a number of unit complexes, which in fact are positively geared and allow me the time to pen this, rather than working for a living.
Essentially, Steve advocates not claiming the depreciation, as you ultimately have to pay it in Capital Gains Tax. However, if you are in the fortunate position of paying 48.5% tax and own an investment property (or 130), you may be doing yourself a disservice by not claiming the depreciation against your income tax.
For example, if you installed a new light fitting, costing $100, you can claim this as a 100% deduction in that year saving you $48.50 in tax, (and if you used borrowed money to do it costs you only the principal, as the interest is a tax deduction as well…but that is a whole new conversation)
However, if you did not claim that against your income tax, and paid it in C.G.T instead, when you sell, the tax benefit of installing that light fitting is now only $24.50, because of the 50% deduction rule for C.G.T.
I guess its boring stuff, but when your depreciation schedule runs into the tens and hundreds of thousands, you can minimise your tax quite effectively, when your income is in the higher tax brackets.
Does anyone agree, disagree or have I put you to sleep?This topic has been touched on a few times here. I find your explananation a little difficult to follow but I think I agree with you.
Even if claiming depreciation does reduce your cost base for CGT purposes it’s only a 50% effect because of the CGT discount. So you may have to pay back 50% of your tax saving when you sell. And if you never sell then you don’t have to pay it back at all.
Rod.
i’ve not read steve’s book,
but I disagree with not claiming depreciation because of the time value of money….the taxation of inflation. $100,000 now is worth much less than after 10,20,30 years. Even if you had to sell and pay CGT, you are give increase cashflow now, in the present.
Also I follow the principle when I buy a good asset that’s producing a good cashflow, the time to sell the asset is never. Warren Buffet works by this principle.
Yes, I’d be on the side of claiming the depreciation allowance if it’s available.
But a slightly different angle of this discussion only came to me last night when I was looking at property prices in a town. I was trying to compare like with like, so was looking at 2br villa units.
Older (1970s) places were about $60k and newer (1990s) places were about $100k. Assuming same location and land size you are paying a premium for the newer place.
Offsetting this might be the slightly higher rent ($10-20pw more) you could charge on the new place, lower repair expenses, possibly better tenants and building depreciation allowance.
But over 100% of this saving could well be swallowed up by bigger repayments and interest bills, so the older place might have higher yield (say 9% vs 7%) and be cashflow positive, whereas the newer one wouldn’t be (before tax).
Another concern is that land depreciates, and buildings depreciate, so the $40k difference in purchase price is all depreciating building. Thus the $100k place would have a small land value component (especially in country) and be like tiny flats in the inner city but with less possibility of appreciation.
You get some of that higher depreciation back in tax, but (especially) if you’re paying a low marginal tax rate, it’s much less than half, so you’re losing.
Thus it doesn’t make sense to get big loans for new properties that won’t grow in value, unless the rent it attracts is high and you save heaps on repair costs.
The city property marketeers often go on about the depreciation benefits of their property.
But to me being attracted to this where the land component is small and unlikely to appreciate quickly (eg a very expensive and very new place in a small country town) doesn’t make sense.
Claim it if it’s there, but don’t make it colour your buying decision.
Let me know if I’ve missed anything.
End of sermon (if anyone’s still reading)!
Peter
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