Property Selection and Tax Benefits
How can property selection nearly double your taxation benefit?
Following on from the example in the article Property Gearing and Taxation, here is a further explanation. The interest and rental expenses taken into account were CASH deductions – these are actual running expenses incurred throughout the year.
For taxation purposes, NON-CASH deductions – claims that are made against the cost of the asset itself are also taken into account.
NON-CASH deductions include things like loan costs, depreciation on fixtures and write-off in relation to construction costs of the building.
LOAN COSTS are costs incurred in acquiring the loan funds and include loan application fees, search fees, government stamp duty on the loan, mortgage insurance, etc. These costs are considered “capital” outlays, but specific taxation legislation allows the costs to be deducted over the shorter term of 5 years or the term of the loan. So these costs are claimed in the first 5 years of the investment.
DEPRECIATION is a tax deduction on the declining value of fixtures and fittings inside the property caused by wear and tear (eg. floor covers, stove, hot water system). Depreciation is usually calculated on the reducing balance.
CAPITAL WORKS WRITE-OFF is similar to depreciation but accounts for the declining value of the building itself (eg. house structure, pergola, carport, garage, etc.). Building Write-off is 2.5% of the construction cost and is written off over 40 years – ON THE ORIGINAL CONSTRUCTION COSTS.
If you do not know the original construction costs, valuations must be obtained from a licenced Quantity Surveyer.
Some restrictions apply to this Capital Works Write-off:
- It only applies to residential dwellings constructed after July 1985
- 4% rate applies to property constructed between 18/07/85 to 15/09/87
- 2.5% rate applies to property constructed 16/09/87 onwards
This is where SELECTING THE RIGHT PROPERTY can nearly double an investors taxation benefit.
For example, in the above property (which is a new dwelling), depreciation and building write-offs were $2,000 and $5,000 respectively, amounting to a non-cash deduction of $7,000.
The amounts for a property built 10 years ago will be less as the construction cost would be lower compared to today’s construction costs.
Even worse, for a house built prior to July 1985, depreciation benefits would be negligible.
Post by Guest Writer David Maynard – CEO of My Tax Zone
Filed Under: Property Investment • Tax Tips
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