Hey all out there,
I’m trying to get my head around the way depreciation works in a Discretionnary Trust structure. I have set up a simple family DT with myself as trustee and am looking into doing the numbers on a townhouse that looks like a potential ok deal, but am stuck at the depreciation part.
The property in brand new and I should be able to pick it up for 270,000 with a rental return of about $310 per week.
Since it is brand knew the depreciation is obviously substantial. For arguement sake say $4,000 for year 1.
How does this depreciation get taken into account on the tax return of the trust. If the trust doesn’t make any money then how can you use depreciation as a tax ofset. Or is the $4,000 simply taken as a straight loss on a profit loss bottom line.
ie putting it crudely and skipping a few things
net income = rent + depro – interest payable.I hope its clear what I’m trying to get at and its a simple answer. After a year or so of doing my homework I’m almost ready to take the plunge and these forums have been an invaluable resource
Cheers
GroagesMy understanding is the trust simply claims the depreciation as an expense. This reduces the profit, and may result in the trust making a loss. If there is a loss, it can be carried forward and offset against future income.
Terryw
Discover Home Loans
Parramatta
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Terry,
I’m not sure that I follow. I thought that depreciation was used to make a property as close to neutrally geared as possible.
If a trust claims it as an expense then this is actually doing the opposite and you would be better off not claiming it at all.
Is this what you are saying?
I thought that the figures would look like
Net return is given by
Income = rent ($16120) + Depro (eg $4000) for year 1
minus
Outgoings = Interest (about 20,000) + rates etc
This works out to be about cash neutral.
If the depreciation is an expense then outgoings is about $24,000 and I’m about $8,000 out of pocket.
Sorry if I’m missing something.
Hello groages
As Terry said depreciation is an expense that you can deduct from your income.
To clarify, your simple equation should look like this ..
Profit / loss = total income(rent) – depreciation – other expenses (interest, rates, repairs etc.)
“I’m not sure that I follow. I thought that depreciation was used to make a property as close to neutrally geared as possible.”
That is true only in as much as you get to deduct this extra expense (which unlike all the others is not a real cash out of pocket expense) against your other income (at your top tax rate) giving you a reduced overall tax bill and thus more cash in your pocket.
This is naturally only possible if you have other income in the trust to offset the loss against. Trusts can not distribute loses.
“If a trust claims it as an expense then this is actually doing the opposite and you would be better off not claiming it at all.”
It is always worth claiming. As I said earlier it is not a cash out of pocket expense and you get to accumulate the loses which you can then offset against any future profits.
A normal DT may not be the best structure for a negetively geared property which is why there is so much discussion on the forum about HDT’s or hybrid DT’s. Do a search and you will find plenty of information about it.
You need to talk to a savy trust/investments accountant before you actually take out any loans or sign any contracts.
Hope this helps [smiling]
ElkaThis is a link to a good post by Terry as to how HDT’s work to effectively allow negetive gearing in a trust. Actually the whole thread is of interest to you I think.
https://www.propertyinvesting.com/forum/topic/23356/3.html?sortfield=&sortorder
Cheers
Originally posted by groages:Terry,
I’m not sure that I follow. I thought that depreciation was used to make a property as close to neutrally geared as possible.
If a trust claims it as an expense then this is actually doing the opposite and you would be better off not claiming it at all.
Is this what you are saying?
I thought that the figures would look like
Net return is given by
Income = rent ($16120) + Depro (eg $4000) for year 1
minus
Outgoings = Interest (about 20,000) + rates etc
This works out to be about cash neutral.
If the depreciation is an expense then outgoings is about $24,000 and I’m about $8,000 out of pocket.
Sorry if I’m missing something.
Hi groages
I am not sure that I follow you now!
Just think of depreciation as an expense that you can claim, but without spending any money. If you don’t claim it, then you are paying more tax.
eg.
Rent $20,000
Interest, Council rates, etc $15,000In this situation, income is $20,000, but you have to spend $15,000 to make that income, so the profit is $5,000.
If this was in a trust, the $5000 could then be distributed and the beneficiaries pay tax on this amount.
eg 2. Claiming Depreciation
Rent $20,000
Interest, Council rates etc. $15,000
Depreciation $5,000In this situation you get an income of $20,000 but need to spend $15,000, but you can also claim depreciation (without increasing your expenditure) so your total claimable costs = $20,000.
Net profit = $0, so nothing to distribute, and no tax to pay.
But you have still really made a $5000 profit as you have an income of $20,000 but have only actually spent $15,000.
Does that make sense?
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
Sorry for slow reply I was interstate trying to source an IP. No luck yet but I know I’m getting closer.
Your last reply makes complete sense. I’d actually sorted it in my head from one of Elkas posts.
For some crazy reason I was thinking of the depreciation as an expense ie. money I had to come up with. Of course this was stupid and may be a factor of being on night shift. You last example explains it well so cheers.Elka if you still read this late post then thanks for the tip on the Hybrids.
I did a lot of research into the structure I wanted earlier this year and decided that the simple discresionary may benefit me longer term. I dont intend to buy anything too heavily geared in the negative and I figure that long term complete discresion over profit distribution throughout a large extended family will have the largest tax breaks. i may be wrong but for the style of IP’s I’ll be after I think its the best and easiest.
Hybrids look nice yes but unless some fo the IP’s are heavily negative then I didnt see the benefit.Thanks to you both
GroagesHi Groages
Another benefit of the hybrids is the ‘refinancing principle’ (or is it principal?). ie the trust can borrow to buy back the units, giving favourable tax benefits.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hello groages, Terry
I’m begining to feel like the 5th leg on a chair as Terry is a trust guru. [smiling]
You might also like to think about the fact that a HDT works just like an ordinary trust if there have been no units sold so you will still have complete discresion over profit distribution throughout a large extended family.
It’s possible (you will need to ask a proffessional) that even with units sold the deed may be so worded that not all income will need to be distributed to the unit holder(s).
I think my main point is that you never know what oppertunities the future brings. If there are no disadvantages or high costs associated with a HDT why not….?
Also I love the point Terry raised in his last post here and that in itself may be a huge tax saving.
Of cause you should check all of this with a proffessional.
Cheers [smiling]
Elka
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