Capital Appreciation or Depreciation?

Capital Appreciation or Depreciation?

When we are investing in property, isn’t capital appreciation the end goal? The cream to top off your espresso martini and the extra day added to your weekend?

Why then has ‘depreciation’ become the latest buzz word in the language of investment property experts? It seems totally counter intuitive.

The answer lies in the fact that depreciation results in the real world equivalent of a pot of gold at the end of a rainbow, tax deductions. Thousands of dollars worth of glorious tax deductions.

How it works is like this; the tax office has recognised that over time, the building, foundations, fixtures and fittings of a house are naturally exposed to general wear and tear and will depreciate in value. They tend to depreciate most in the first few years after being built / installed and the depreciation gradually slows over time.

In order to counter this, the tax office has allowed investors to claim this depreciation as a tax deduction. The deduction is greatest in the early years after the investment property has been built and gradually reduces over time. This is one of the advantages of building a new home, as opposed to buying an older home where the depreciation schedule (used to calculate the depreciation value over time) may have been exhausted.

What blows my mind is that a frighteningly large percentage of people (either due to a lack of understanding of the benefits or worse, pure negligence) that don’t make use of this rare tax break.

So how do you make the most of it?

  1. Obtain a depreciation estimate from a trusted professional*
  2. Complete a tax variation form based on the figure provided
  3. Submit to your accountant and your employer
  4. Bob’s your uncle

*You can expect to pay around $425 for this estimate (discounts available for IPG clients) – a small sum in comparison to the thousands of dollars you will be saving.

So it is possible, even probable to experience capital appreciation whilst taking advantage of the tax benefits of depreciation. Go figure!

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