Yong-Long Lai

Investing For Beginners

Posts Tagged ‘tax deduction’

Depreciation Schedule – The Benefits Explained

November 16th, 2008

Yong-Long Lai

Last week I wrote about Depreciation Schedule – Where Can I Get One?, I realised that some people may not know what a depreciation schedule is and why you actually want to get one. So I better explain myself…

The dictionary definition for depreciation is: “A decrease or loss in value, as because of age, wear, or market conditions.”

The good news for property investors is that the Australian Tax Office (ATO) allows us to claim this “decrease or loss in value” an expense. The best thing is that we actually didn’t pay for it, i.e. we didn’t have to pay anybody for the “decrease or loss in value”, but we are allowed to claim it! People in the accounting industry call this paper loss since no money actually comes out of the investor’s pocket.

Let me help you understand with an example. I will be using a slightly modified version of my personal transaction:

Property Purchase Price: 370,500
Loan Amount: $359,385
Annual Interest (8.2%): $29,469.57
Annual Rental: $15,600
Water Rates: $800
Council Rates: $800
Strata Rate: $1,000
Depreciation (First Year): $3,000 (This is the number from your depreciation schedule – and will vary from property to property and is dependent on the age of the property and capital improvements that has been done on the property)
Tax Rate: 30% (My Assumption)

If I don’t have a Depreciation Schedule:

Net Income: $15,600 – $29,469 – $800 – $800 – $1,000 = -$16,469
Tax Deduction (30%): $4,940.7
Actual Cash Outflow: $4,940.7 – $16,469 = -$11,528.3

If I have a Depreciation Schedule

Net Income: $15,600 – $29,469 – $800 – $800 – $1,000 – $3,000 = -19,469
(used for tax calculation)
Net Income: $15,600 – $29,469 – $800 – $800 – $1,000 = -16,469 (actual
cash out flow – however depreciation does not cost you real cash and is not included)
Tax Deduction (30%): $5,840.7
Actual Cash Outflow: $5,840.7 – 16,469 = -$10,628.3

As you can see there is $900 worth of savings (real money). That’s potentially a short holiday, a new computer, an iPhone, 15 months subscription to Your Success Club, saving to offset your interest paid, the list goes on!

Depreciation Schedule – Where Can I Get One?

November 9th, 2008

Yong-Long Lai

I was talking to some people who owned investment properties last week and I was astonished that even though they knew about depreciation they didn’t know they could actually buy a depreciation schedule. Most people know about claiming depreciation for investment properties, but obviously not everybody knows that you can pay a qualified valuers to get an Australia Tax Office (ATO) approved depreciation schedule which you can used in your tax return. So this post is dedicated to closing this gap!

I have used several companies to purchase depreciation schedule for my properties, this is just the ones I have personally used and this is definitely not the definitive list. Feel free to Google one or ask your friends or even go look through the yellow pages

Deppro (full service – a valuer will come to your property and calculate the depreciation for your property)
Tax Shield (budget service, desktop estimates are done, I don’t think an actual real life valuer actually comes on site to see your property. This is better for those older type properties with not much depreciation left, ie. no new renovations or improvement done to the property for decades)
Local Valuers (full service – a valuer will come to your property and calculate the depreciation for your property. Its usually cheaper than Deppro and those bigger companies, you can find them in the yellow pages or Google) The service is sometimes better from local valuers compared to the big boys because they want your business. So its really up to you…

So if you have an investment property, do yourself a favour and order a depreciation schedule especially if you don’t already have one. You are literally throwing good money away if you don’t have a depreciation schedule.

PS: You can actually negotiate on the price with Deppro (for that matter, with anybody), I told my colleague about deppro and he was smart enough to ASK for a better price. I think he got $100 off simply because he asked! So the question is, are you brave enough to ask?