In the world of property investment, the strategy of negative gearing is well-known for its potential tax advantages. But how does depreciation factor into this equation, and is it still relevant? Let’s dive into the details.
What is negative gearing?
Negative gearing, for those new to the concept, allows investors who have made a loss on an investment property to claim that loss against their personal income for that year.
As a result, it lowers the individual or entity’s taxable income and therefore their tax payable. This can mean a boosted tax refund (or a lower tax bill depending on the circumstances) at the end of the financial year. Learn more about negative gearing in general here.
How does depreciation factor into a negative gearing strategy?
Capital allowances and depreciation are legitimate tax deductions claimable by investors to account for the ageing and wear and tear of their investment property over time (the loss in value of the building and assets as they age is claimable each year as a tax deduction).
Depreciation is in fact one of the largest tax deductions claimed by owners of rental properties. Learn more about what tax depreciation is here.
Depreciation helps reduce tax payable when positively geared
For a property that is positively geared, claiming for depreciation helps to reduce the profit made on the investment in a year, which means less tax is payable. Any change to negative gearing law will not change the ability of these investors to claim for depreciation and to reduce their tax liability.
Depreciation improves tax position when negatively geared
For property that is negatively geared, claiming depreciation further increases the loss made by the investment property. This greater loss is claimed as a legitimate tax deduction against personal income, and further decreases the investor’s tax liability or boosts a tax refund.
The following tables show how claiming for depreciation affects the cash flow position of a property and the tax payable for an investor.
How claiming depreciation affects cash flow for a negatively geared property
This property generates a rental income of $455.00 per week. The “No Depreciation” column shows the cash flow position if no depreciation is claimed – it is making a loss of $2,840.00 per annum, which for this investor means a tax refund of $923.00. The property is still cash flow negative $159.75 every month.
When claiming depreciation, the paper loss is increased to $15,852.00 per annum. The tax refund is boosted to $5,151.90, and the property is now cash flow positive $192.66 every month – a turnaround of $352.40 every month!
How do you claim depreciation in your tax return to the ATO?
An accountant will use your depreciation schedule to apply your depreciation deductions when submitting your tax return to the ATO.
Depreciation is claimed under the property-related expenses area of a tax return.
You can see from the table below, that additional cash to this investor for claiming depreciation is $5,079. A depreciation schedule is a one-off fee that is 100% tax deductible and forecasts a full 40 years of depreciation deductions.
So, regardless of whether your investment property is positively or negatively geared, you still benefit from having a depreciation schedule
As the above tables show, regardless of whether your property is making a loss or a profit each year, investors will still boost cash flow by claiming for depreciation.
To maximise the depreciation deductions for your property, engage the services of a specialist quantity surveyor, who is also a registered tax agent.
Not all quantity surveyors are depreciation specialists, and a depreciation specialist must be registered with the Tax Practitioners Board to provide depreciation schedules for tax purposes.
If you own an investment property, the best way to ensure your depreciation deductions have been maximised is to use a depreciation schedule prepared by Capital Claims Tax Depreciation.
For an estimate of deductions you may be entitled to, or to have your current depreciation schedule reviewed free of charge, please don’t hesitate to get in touch.
FAQS about Negative Gearing
Is negative gearing a good thing?
Whether negative gearing is a good thing or not depends on your financial situation and investment goals. It’s important to assess your own financial situation and seek professional advice before deciding if it’s a good strategy for you.
Who really benefits from negative gearing?
Negative gearing primarily benefits high-income individuals who can use the tax deductions from their property losses to lower their overall tax liability. It’s a strategy that can provide tax savings and potential long-term gains but may not be suitable for everyone.
What is negative gearing in simple terms?
Negative gearing is when you buy an investment property, like a rental home, and the expenses of owning it, such as the mortgage and upkeep costs, are more than the income you make from renting it out. People often do this to reduce their taxes and hope that the property’s value will increase over time to make a profit in the future.