How Can I Use Depreciation And Other Strategies To Maximise My Investment?
When you’re not using depreciation and other strategies to maximise your investment, it means you risk losing money that could be yours. The reason for this is that there is a good chance you are spending more than you need to and paying tax at a higher level than is actually necessary.
Making use of depreciation and other strategies is all about getting your investment to work for you. This means that you can legally minimise your tax and keep more money in your pocket while you’re building your wealth.
The point is that, without any further outlay, you're still creating income for yourself and still creating growth. In some cases, the taxman will actually help you pay for your investment.
Let’s say that you’re in the higher tax bracket, paying 45 cents on the dollar in tax. If you use the expenses related to your investment property, you can reduce your taxable income down to a point where you are in a lower tax bracket. This means you could save yourself many cents on the dollar.
If you are earning $200,000 a year, then this is a saving worth making!
The Art Of Depreciation
So how does depreciation work?
In effect, depreciation gives you an allowance against your income-producing asset. It is this allowance that gives you benefits when it comes to your income tax.
As an example, imagine you buy a car and you use that car to produce income. When it comes to tax time, any expenses you've had for that car you can claim back against your business. These expenses then come off your taxable income.
Suppose you earn $100,000, and your car costs you $10,000 in expenses. That would bring your taxable income down to $90,000 instead of $100,000, and therefore you are only taxed on the $90,000.
It's exactly the same way with income-producing real estate assets. However, depreciation does dwindle over time as fixtures and fittings get older, meaning that you can claim less wear and tear on them.
This is particularly relevant if you own an older existing property and haven't made any updates to it for ages. In this instance, you would have very little depreciation, which, in the example above, means you wouldn’t be able to claim any expenses on the property. You'd still have to pay income tax on $100,000.
How To Claim For Depreciation
The way to ensure you can claim for both plant and equipment AND the capital works components of depreciation is to buy a new home as your investment property.
This is one reason why new homes are such an incredible investment opportunity. With a new home, if your combined income from your salary plus the income you get from your rental property is $100,000, then you will save money.
Why? Because when you’ve got a brand-new house, you can claim depreciation on the building, the fixtures, the fittings, the perimeter walls, the fences, and a whole lot more.
It is possible that you could claim depreciation on everything in that new house for around $10,000 a year. In exactly the same way that you can claim expenses against your car, you can claim this depreciation against your rental home.
This would mean that your taxable income would be reduced by around $10,000 a year. So you would only pay income tax on $90,000, rather than $100,000.
It is worth noting that the information I have provided gives an overview of how you can benefit from depreciation. I always recommend you consult a qualified quantity surveyor as depreciation opportunities may change from time to time, and they will be able to ensure you receive the most up-to-date advice.
To your success,
Australia’s Authority On Real Estate Investment For Busy Professionals
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