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How to generate cash returns through property depreciation

By Andrew Bell

If you own rentals in Surfers Paradise, then you likely know all about the benefits of positive cashflow and capital gains. For many, these are the bread and butter when it comes to turning real estate into cold hard cash. But these are hardly the only ways to get financial benefits out of a property purchase! 

While we love to use the 'like a fine wine' simile to express how things age gracefully and become more valuable or attractive, the reality is that most things often depreciate in value over time. This applies to the physical make-up of your property and the assets within it as well. A rental property that depreciates while it generates you income enables a huge range of tax deductions – are you overlooking these? Here's what you need to know. 

What exactly is depreciation?

Generally speaking, depreciation on your real estate in Surfers Paradise is split into two areas: Capital works, as well as plant and equipment. The former is basically the bricks and mortar of your property – construction costs and the like. Meanwhile, the latter is what you put inside the house: Appliances, furniture and so on.

Both of these types of assets will depreciate in value over time, allowing you to claim tax deductions – as long as the property generates income for you. Over the life of these items, you can claim portions of their cost against the tax you have to pay, reducing the costs of owning a property. 

How do I make the claim? 

Property depreciation is a little more complicated than some of the other tax benefits you can get on Surfers Paradise property. For starters, you need to get a tax depreciation schedule. Usually carried out by a quantity surveyor, this outlines the items that can give you tax benefits, and details their depreciation over time.

This effectively maps out the deductions you can make over the coming years. It will include the value of furniture and appliances, as well as the cost of construction and the expected loss in value that will occur over the long-term. 

How much do I get? 

Ah, the million dollar question. If your property was built between 1985 and 1987, then you might be able to claim 4 per cent of the initial construction costs off your tax for 40 years. If established after 1987, this drops to 2.5 per cent – which is still a significant deduction. Because homes are built to last, the depreciation will be slower than with the plant and equipment, but given the high initial cost this can still be a huge boost to your bottom line.

As for the equipment depreciation, this will depend on what you have inside your Main Beach real estate – after all, a microwave and a couch aren't going to depreciate at the same rate! 

Why should I do it?

It can be a lot of work to get the schedule together and there will be some surveying costs, but the long term tax benefits are more than worth the time. By paying less tax you are improving your bottom line and leaving more cash in your pocket, allowing you to set about paying off your principal or perhaps putting it towards the next step in your Surfers Paradise investment strategy. 

For more information on how to make the most of property depreciation, you might want to join our 2015 Landlord Symposium. It is held on 6 June and once you RSVP, you will join a wide family of landlords and interested parties sharing tips and ideas on making the most of your investment property.

As always, for any further questions, don't hesitate to contact us at Ray White Surfers Paradise. 

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