Apartment Cash Flow

Owners of properties which generate an income are eligible for significant taxation benefits.

According to Bradley Beer, the Managing Director of BMT Tax Depreciation, the average investor can claim between $5,000 and $10,000 in deductions in the first full year.

Yet Beer says “Research shows that 80% of property investors are failing to take full advantage of property depreciation and are missing out on thousands of dollars in their pockets.” 

Depreciation is often missed because it is a non-cash deduction. The investor does not need to spend money to claim it. As a building gets older, items wear out - they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a deduction. 

So what items are depreciable within a property, how do investor’s go about claiming depreciation and what difference will claiming depreciation make to an investor’s cash flow?

Depreciation can be claimed as a capital works deductions for the structure of the building including walls, the roof and floors as well as for the fixed items that cannot be easily removed, for example toilets, sinks, baths and kitchen cupboards. Capital works can only be claimed if the construction commenced after dates legislated by the ATO. For residential property this date is the 15^th of September 1987 and for commercial buildings this date is the 20^th of July 1982.

Despite these restrictions, if an investor owns a property constructed prior to these dates, there still will be depreciation deductions available. Often older properties have been updated or renovated over time and any structural renovations which have taken place after the ATO legislated dates may entitle the owner to claim depreciation for these items, even if they were completed by a previous owner of the property.

Investors can also claim depreciation for any plant and equipment asset contained within the property, for example carpets, hot water systems, dishwashers, air-conditioning units and garbage bins. Depreciation for these assets is not determined by their age, rather the individual condition and quality of each asset and they are claimed based on their individual effective life as determined by the ATO.

To claim depreciation, investors should contact a specialist Quantity Surveyor to complete a tax depreciation schedule for their property. Quantity Surveyors are one of the few professional recognised by the ATO to have the appropriate construction costing skills to calculate the cost of items for the purposes of depreciation.

A specialist Quantity Surveyor will organise an inspection of the property to take photos of all assets contained within the property as well as take measurements and note any capital works. They will then prepare a detailed schedule outlining all of the deductions the owner can claim for the life of the property (forty years).

Depreciation: An investor profile

The following scenario shows how claiming depreciation will make a difference for an investor who owns an apartment purchased for $528,000 one year ago.

The property was rented for $470 per week with a total income of $24,440 per annum. Expenses for the property including interest, rates and management fees totalled to $37,935.

The following scenario shows the investor’s cash flow with and without a depreciation claim of $9,938.

Before claiming depreciation the investor would experience a loss of $164 per week for the first year of ownership for her property. By claiming depreciation, the investor was able to turn their cash flow position into a more positive one, reducing their loss to just $93 per week. In total BMT Tax Depreciation were able to save this investor $3,692 in just one year.