Hi All
Ealier this year I attended a seminar by Margaret Lomas and have also read some of her books. My understanding of her investment statergy is to buy cash flow positive properties, instead of positively geared properties, (as according to her the the later are very scarce). She suggests buying property as new as possible and claiming the maximun depreciation on the property to provide you with the positive cashflow.
This all seemed to make sense to me until I read a recent article that stated that any depreciation that you claim on the IP will increase your capital gain when you sell by the same amount. Most depreciation apparently also occurs in the first 5 to 10 years after buying a new IP.
I'm now totally confused. What's the point of claiming the depreciation if you seem to give it all back when you sell the IP.
Love to get some comments
Martin
Martin
Very good point made however unfortunately the sales staff at the higher pressure seminars dont tell you such things.
I guess it as about cash flow. If you pay little or no tax now and defer it until you sell the property.
Other consideration is the CGT concession.Richard Taylor | Australia's leading private lender
Martin,
Even though it is added back to increase your capital gain by the same amount, your capital gain can be reduced by the 50% discount. So, you get the full effect of the tax deduction at your marginal tax rate when you claim the depreciation, but upon capital gain, you only pay tax at 1/2 your marginal tax rate. Plus, the cashflow benefit of claiming now and paying later.
Hope that helps
Ross
Thanks for the response.
I assume then that capital gain is vital for the equation to work then. Is it better to buy in areas that are going to give high capital growth and not be so worried about positive cash flow and depreciation? Is it better to buy an IP that is already 5 to 10 years old. If you were in the situation where you had to sell in a flat market, you could actually lose on the deal if you had to deduct your depreciation claimed, back off the cost base. That could turn out to be a bit of a shock for some people.
This one comes up alot.
Anything you claim on the building is added back when you do your CGT calcs.
Depreciation claimed on the Assets (fixtures and fittings) is NOT added back. And in many Schedules, there is more depreciation in the Assets than is claimed on the building.
ScottHi Martin,
It can get a bit confusing especially when there seem to be different views from experts.
I am a multiple property investor so can share my personal experiences with you. I have a mix of older and newer properties as well.
As I am more into the hold and refinance strategy rather than selling, the downside of depreciation does not really affect me, so I merely use it as a tool to improve my cash flow. Whilst the impact is better with newer properties I still get some good impact from my older properties.
You really need to consider the whole equation when looking at a particular investment property and align this to your own personal strategy and needs… depreciation considerations are just one apect.
I prefer to look at the investment deal as a whole and consider depreciation as an added bonus
Mark
Martin63 wrote:Hi AllEalier this year I attended a seminar by Margaret Lomas and have also read some of her books. My understanding of her investment statergy is to buy cash flow positive properties, instead of positively geared properties, (as according to her the the later are very scarce). She suggests buying property as new as possible and claiming the maximun depreciation on the property to provide you with the positive cashflow.
This all seemed to make sense to me until I read a recent article that stated that any depreciation that you claim on the IP will increase your capital gain when you sell by the same amount. Most depreciation apparently also occurs in the first 5 to 10 years after buying a new IP.
I'm now totally confused. What's the point of claiming the depreciation if you seem to give it all back when you sell the IP.
Love to get some comments
Martin
Hi Martin,
Depends on your strategy as well……have you sorted that one out?
I work with an older investor who refuses to claim depreciation as he believes it will all be added back (in the future if sold), however, we use it to increases our cashflow and therefore holding costs (in the now )
See pertinent comments from Scott as well re fixtures and fittings, as a sidenote we use depreciator for our schedules due to Scotts continual and good natured answering of our inane questions and our experience with the staff sent to do the job
depreciation is a "non-cash deduction" i.e. I would not receive cash in hand but instead it would be deducted from my taxable income, this could potentially put me into a lower tax bracket, it also assists you in regards to future replacement of assets
Hi Martin,
If you go through Margarets books again you will find that her strategy is buy and hold, to provide you an income in the future. She doesnt really recommend selling unless neccessary.
Tracy
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