Depreciation Schedule - The Benefits Explained
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!
