Most property investors are aware that one of the best ways to negatively gear a rental property is through depreciation.
One of the reasons that people like depreciation is because the depreciation is built into the price of the property. You can therefore claim the depreciation, without foregoing ongoing cash outflows.
If you purchase a property for say $750,000, the breakdown of the purchase price might be:
Construction cost of the building: $225,000
Cost of assets such as stoves, blinds, dishwashers etc: $25,000
Land value: $500,000
For buildings younger than 40 years old, the ATO allows you to claim 2.5% of the cost of the building as a depreciation deduction.
The estimated construction cost is obtained by engaging the services of a quantity surveyor company, such as BMT Quantity Surveyors or Deppro.
In this example, the cost of the building is $225,000 and the depreciation is 2.5%, for an annual depreciation deduction of $5,625.
That's a fairly reasonable amount in my opinion!
I don't know too many people that wouldn't want to claim an extra $5k in their tax return, especially when you don't have to fork over $5k to claim the deduction.
As the amount was already built into the purchase price of the property, you don't physically have to hand over another $5k to claim the deduction, it is essentially a notional or 'book' amount.
For most people, this is where the sales pitch ends.
They see the benefit, organise a report, and claim the tax deduction.
It's all well and good until....the taxpayer goes to sell the property.
That's because the ATO has this theory about "double dipping".
What this means is that, you can't claim the same deduction twice. Makes sense.
When you claim depreciation that is built into the purchase price of an investment property, the amount you claim as depreciation reduces the amount you are considered as having paid for the property for the purposes of calculating your Capital Gains Tax.
This means there will be more capital gains reported when you sell the property.
Okay, wait, it's starting to get technical.
Using the example above, let's say the taxpayer bought an investment property for $750,000 and claimed depreciation of $5,625 for 10 years.
The total depreciation on the building claimed over that 10 year period is $56,250.
When you sell the property, the cost base (the amount you paid to acquire the asset) according to the ATO is no longer $750,000, but actually now $693,750 (i.e. $750,000 less depreciation of $56,250).
If you are an individual investor and have owned your investment property for more than 12 months, you receive a 50% reduction in the capital gain.
This means that effectively 50% of your depreciation is clawed back when you sell the property, provided the property is owned for more than 12 months.
Is property depreciation still worthwhile?
In my opinion, generally yes, but as usual, we recommend the use of an appropriate qualified tax agent so that advice can be specifically tailored to your specific circumstances.
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