As a property investor, it is important to stay informed about economic factors and how they can affect your property investment. One of these factors is interest rates.
Interest rates are the cost of borrowing money, and they are set by the Reserve Bank of Australia (RBA). The RBA’s main objective is to maintain price stability and promote full employment, which means they try to keep inflation within a target range of 2-3% per annum.
When inflation is high, the RBA may increase interest rates to reduce demand and control inflation. On the other hand, when inflation is low, the RBA may decrease interest rates to stimulate demand and boost economic growth.
For property investors, interest rates are particularly important because they can affect the affordability of mortgages. When interest rates are low, borrowing money to invest in property is more affordable, and property prices tend to rise. On the other hand, when interest rates are high, borrowing money becomes more expensive, and property prices tend to fall.
As a potential offset to the increased mortgage payments, another important factor for property investors to consider besides claiming for the increased interest on the loan is depreciation.
Depreciation is the decrease in value of an asset over time due to wear and tear, and aging of a residential or commercial investment property.
Property investors are entitled to claim depreciation as a tax deduction, and it can reduce their taxable income which can help boost their cash flow. And by boosting the cash flow, it can make investing in property affordable.
Managing the Transition from Fixed Loan Rates or Interest Only
When property investors come off their fixed loan or interest-only rate, they may be faced with higher interest rates and mortgage repayments. This can put pressure on their finances and cash flow, especially if they were not prepared for the increase.
Claiming depreciation is particularly important for property investors because it can offset the impact of rising interest rates and inflation. Property investors can claim their depreciation deduction in real time or at the end of the financial year.
To claim depreciation, property investors need to engage a qualified quantity surveyor to prepare a tax depreciation schedule.
The figures below are from our client Yuki who purchased a brand-new 4-bedroom residential investment property in 2020. It outlines what Yuki claimed without tax depreciation and with tax depreciation.
As you can see from above with Yuki claiming Division 40 and Division 43 depreciation, Yuki’s annual deductions on the property increases by $13,421. For Yuki that means an additional boost to her cashflow of $4,589.23 per year which is $382.45 per month.
If you multiply the effect for returns claimed over future years, you can see how lucrative and important it can be for investors to claim their depreciation entitlements.
Accessing Tax Savings in Real Time
One of the great advantages of a tax depreciation schedule is that it accurately forecasts your deductions for the remaining ‘depreciable’ life of your investment property.
This means you can reliably adjust your taxable income in advance, so you can pay less tax from your wages each pay and effectively have more disposable income every week.
To do this, your accountant/financial adviser completes a Pay As You Go (PAYG) Variation Form and submits it to the ATO. The ATO will provide a notification to your employer so they can adjust their processing to deduct less tax from each pay.
A dollar in the hand today is worth more than a dollar in the hand in 12 months’ time, as that extra cash can be used to pay down debt faster, reinvest, or simply make the investment property affordable while you wait for capital and rental increases.
By claiming depreciation, it has the potential to greatly improve the cash-flow position of a residential or commercial investment property. Understanding the impact of depreciation on cash flow is particularly useful when assessing the feasibility, or affordability, of an investment property. Investors need to know how it is going to affect their back pockets every week.
If you would like a free quote for your residential or commercial investment property, there are two ways. You can call and speak to one of our friendly team members on 1300 922 220. Or you can complete our easy ‘Request a Quote’ online form.depreciation