Building – Depreciation is claimable on properties built after 1985. You can claim depreciation at a rate of 2.5 percent per annum (on investment properties). That means that the government estimates that it takes 40 years for a building to be worth zero after being built. One aspect that must not be overlooked when purchasing/selling property is that capital gains tax is payable on depreciation of the building. In other words, every dollar you claim in depreciation increases the capital gain, by reducing the cost base from the original purchase price.
Fixtures and fittings – A Quantity Surveyor will value the fixtures and fittings and set out a schedule that will determine how much you can claim each year on your tax return. Engaging the services of a Quantity Surveyor doesn’t guarantee that your depreciation deductions will make you negatively geared. That will be determined by the overall differential between rental income versus total deductible expenses. Examples of fixtures and fittings that can be claimed include ovens, dishwashers, heaters, coolers, floor coverings and window furnishings.
The Property Planner’s fast fact
2017 Federal Budget takes aim at negative gearing
The 2017 Federal Budget has advised that fixtures and fittings will only be claimable if you purchased the fixture or fitting yourself, not if it was pre-existing in the property. This constitutes a significant change to what is claimable for investors.
Overview – Depreciation benefits generally are at their greatest from the moment of purchase and reduce over time. This is just one reason to be careful when being sold on the benefits of tax deductions alone, when purchasing a property. If the building/dwelling itself is going backwards in value, this is going to compete against any land value appreciation and inhibit overall capital growth prospects.
Below is an example of a negatively geared property
Table 1 – Negative gearing example
|Rent = $20,000 per annum||Interest = $18,000
Body corporate = $2,000
Property management = $1,000
Repairs and maintenance = $500
Rates, water = $1,500 Depreciation = $500
|TOTAL INCOME: $20,000||TOTAL EXPENSES: $23,500|
- Total loss of $3,500.
- If taxable income for the year is $100,000, your taxable income would be reduced to $96,500.
- Tax break of $3,500 x 37% tax rate = $1,295 tax saving.
David is the Founder and Managing Director of Property Planning Australia, author of ‘How to Succeed with Property to Create your Ideal Lifestyle’, co-author of ‘Property for Life – Using Property to Plan Your Financial Future’, co-host of the ‘Property Planner, Buyer and Professor Podcast’ and a widely-published media commentator. With more than 20 years of experience, David is passionate about educating others to make informed, and ultimately, more lucrative property investment decisions. David established Property Planning Australia in 2004 – with the vision to educate and empower Australians to make successful property, mortgage strategy and money management decisions. Property Planning Australia’s operations have earned acclaim and national industry awards for its unique fusion of property planning, education, money management, mortgage strategy and risk management. All supported by multi award-winning customer service.