Your Success Club > Articles > Depreciation Schedules – The Benefits Explained!
Depreciation Schedules – The Benefits Explained!
By Yong-Long Lai
Its amazing how many people I've meet who owns an investment property and don't have a depreciation schedule. When I ask them why, the answer I get is simply, "What is a depreciation schedule?" The reason why they don’t have one is simply because their accountant never asked them to get one and this is usually due to the fact that their accountant doesn’t have an investment property of their own, hence don't understand what other deductions property investors can claim on their investment property.
Just incase there are readers who don’t know what a depreciation schedule is or why some readers are thinking, "why do I need 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 don’t actually 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 payable, the list goes on!
Your Success Club > Articles > Depreciation Schedules – The Benefits Explained!