Depreciation :TAX ,,, how does it work.

Hi,

This is how I understand it to be. You buy something new for instance and as the building, kitchen, bathrooms, paint, carpet whatever ages the value drops. As this value drops you offset this loss of value by claiming depreciation.

You depreciate this amount say over 5 years for instance. So ie $1000 first year, then the amount is lower every year as the item is no longer worth say $1000 but is now worth $800 in year 2. Because you have depreciated it. The depreciation is then worked out on this amount. And so on until it worth almost nothing. If you do buy new a quantity surveyor can create a report that you give to your accountant with all of the depreciation listed out.

This is the way some property investors such as Margaret Lomas make their properties cash flow +. According to one site I looked at (BMT and Ass Quantity Surveyors) the building doesn't necessarily need to be new which I didn't know.

Hope this helped and didn't just add to the confusion

D

This is how it works with tax.

Profit = Income – Expenses.

Income = rent
Expeneses = cash expenses and non cash expenses.

non-cash expenses are things you can claim, but not pay for directly. These can include:
– Borrowing costs (sometimes these are added to the loan)
– Depreciation of building
– Depreciation of fittings
– Travel

Cash expenses include everything else you pay for related to the property.
– rates
– insurance
– cleaning, mowing, gardening
– land tax (if any)
– repairs
– water
– Interest

Usually if your loan is large the profit will be negative. That means you have a loss. This loss can then be used to offset other income.

eg. You earn $50,000 in your day job. Your property has a $10,000 loss.
Your overall income is now $40,000
The tax you need to pay reduces. You have probably paid tax on $50,000, but your income is only $40,000 so you will get a refund when you do your tax. If you work out all of this at the start of the year you can get a letter from the ATO to tell your employer to take out less tax week by week – which you can use to reduce the loan on your PPOR by (never reduce an investment loan).

Also you should note that even though you may have a large loss, your property may be income positive as large parts of the expenses can be generated from non cash expenses which you are not actually paying.