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There is a lot of information on investment
today. The only suggestion we can make to you is, know why
you want to invest and how long for.
If you wish to invest purely to bring your tax bracket down
and hope the equity will go up in the investment property,
then off the plan or fairly new maybe the way to go. Depreciation
goes a long way.
Below is an example; however everyone is different. You might
want to retire near the beach and you see the prices going
up and up. Therefore you may wish to purchase a property there
now and rent it out with the thought in mind that when you
retire you will sell your current property, do up the beach
house and invest the rest of the funds to support yourselves.
You might be very handy and want to purchase run down houses
do them up and on sell for a profit.
This is why we ask you how long are you thinking of keeping
the property and what is your overall plan. It is imperative
to have a plan so you can obtain the right finance for that
plan and have the titles in the correct names for capital
gains or gearing purposes.
Always check with your account or finance planner.
Tax Depreciation greatly enhances the annual real return
of an Investment preoperty. A scenario is provided to illustrate
how the equation changes once depreciation (a non-cash deduction)
is applied to a scenario where the investor is in the top
tax brachet of 48.5%.
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2 Bedroom Unit |
Income |
Expenses |
| Purchase Price |
$400,000 |
Rent p/a $350 x 52
= $18,200 |
Loan -interest only $28,000
Property M’ment, insurance and rates, repairs
etc $5,500 |
| Stamp Duty |
$13,500 |
| Solicitor fees and other costs |
$4,500 |
|
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|
|
| Total |
$418,000 |
$18,200 |
$33,500 |
|
| Scenario 1: Before
Tax Depreciation is applied Net Loss |
$(15,300) |
| Actual after tax cash outlay by investor
(excl depreciation) p/a |
$(7,880) |
| Cash outlay by investor (excl depreciation)
per week |
$(151) |
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|
|
|
| Scenario 2: After
tax Depreciation is applied |
|
| Net Loss before depreciation |
$(15,300) |
| Add Depreciation benefit – full year
|
$(9,800) |
| Total Tax Loss |
$(25,100) |
| Tax ‘savings’ @ 48.5% |
$12,174 |
| THEREFORE |
|
| Net Cash Outlay |
$(15,300) |
| Less Tax Savings |
$(12,174) |
| Actual after tax cash outlay by investor
(incl depreciation) p/a |
$(3,126) |
| Cash outlay by investor (incl depreciation)
per week |
$(60) |
This simple example clearly shows the impact of depreciation
on the after tax cash outlay per week. There is a significant
difference in the after tax cash outlay when depreciation
is applied demonstrating the importance of maximising this
‘non-cash’ tax deduction.
Without depreciation there is a significant negative cost
to the investor totalling $151 per week. Employing a specialist
to maximise the available depreciation significantly enhances
the investors cash flow position. Total cash outlay reduces
to $60 per week.
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