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Investors often question what the real cost will be to hold a
property they’re considering purchasing. It’s important to
ensure that their purchase provides them with the maximum
There’s a myriad of expert advice available and every individual
investor has their list of what the property they’re looking for
Astute investors consider the potential rental return of the
property, the property’s location in proximity to local services
and facilities, local employment drivers and historical growth of
properties within the area, while other investors limit their options
by only looking at properties within close proximity to their home.
To get a true calculation when making a decision to buy a
property, investors should also work out the tax deductible
costs and other deductions involved in owning the property,
such as property management fees, rates, interest, repairs and
maintenance, and property depreciation.
These deductions add to the investor’s net cash return and
every deductible dollar comes back to the owner at their marginal
The amount of depreciation available varies significantly from
property to property and can be difficult to estimate. Because of
this, investors often fail to consider the financial benefit of claiming
depreciation prior to making their purchase.
By incorporating depreciation calculations into research
conducted prior to making a purchase, an investor may actually find
the property to be more affordable.
¿ CASE STUDY
Vanessa and Greg have been looking to buy a townhouse as
A property they have recently seen listed, a two-bedroom
townhouse on offer for $495,650, is in a great location close to
schools, shops, public transport and a park.
Before making an offer on the property, Vanessa and Greg have
completed some preliminary research by asking their property
manager for a rental appraisal. This found the property would have
an expected rental income of $505 per week, or $26,260 per annum.
Vanessa and Greg also estimated what costs would be involved in
owning the property if they decided to go ahead with the purchase.
Costs such as interest, property management fees, rates, repairs
and maintenance totalled $35,639.
Aware that once the property became income producing they
would be entitled to claim depreciation deductions for both the
building structure and the plant and equipment assets, Vanessa
and Greg contacted a quantity surveyor for a depreciation estimate.
The quantity surveyor found that they would be able to claim
about $9500 in depreciation deductions in the first full year.
This example below shows how including depreciation in the
numbers prior to making a purchase can really assist the buyer
to make a more informed decision.
Without depreciation, the property investor would experience a
loss of $114 per week during the first year of owning the property.
By making a depreciation claim, this cost is reduced to $46,
saving them $68 per week or $3536 in the first year of ownership.
Once an investor has made their purchase and the property
becomes income producing, the income earned from depreciation
can make a big difference to the owner’s future cash flow.
For a handy application to get an estimate of the available
deductions for an existing or a potential investment property, visit
Want the secret to future
cash flow success?
Expert quantity surveyor and the managing director of
BMT Tax Depreciation, www.bmtqs.com.au .
TWO-BEDROOM TOWNHOUSE PRICED AT $495,650
SCENARIO WITHOUT DEPRECIATION CLAIM
SCENARIO WITH DEPRECIATION CLAIM OF $9500
$35,639 Annual expenses
Annual income (505 x 52 weeks)
$26,260 Annual income (505 x 52 weeks)
Pre-tax cash flow (income less expenses)
- $9,379 Pre-tax cash flow (income less expenses)
Total taxation loss
- $9,379 Total taxation loss (pre-tax cash flow + depreciation )
Tax refund (tax loss x tax rate of 37%)
- $3,470 Tax refund (tax loss x tax rate of 37%)
Annual costs of the investment property (pre-tax cash flow + refund)
- $5,909 Annual costs of the investment property (pre-tax cash flow + refund)
Weekly cost of the investment property
- $114 Weekly costs of the investment property
DIFFERENCE OF $68 PER WEEK
*The depreciation estimates in this case study have been calculated using the diminishing value method of deprication and are based on a full financial year claim.
DEPRECIATION // BRADLEY BEER
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