Just because an investment property is negatively geared, it does not mean it cannot produce a positive cash flow.
Negatively Geared vs. Positively Geared Properties
The terminology around investing in property can be confusing, especially when it comes to ‘gearing’. People will always have differing views on whether it’s better to have a ‘negatively geared’ property, or a ‘positively geared’ one, and yield will always fluctuate according to interest rates, market rents etc.
In essence, if a property is negatively geared it means there is a shortfall between the income generated by the property and the costs (the loan and other expenses) of holding and managing it. When a property is positively geared, it’s the opposite, and the property is actually making money after costs.
The Hidden Potential of Negative Gearing
What many people don’t realise though, is that a property can be negatively geared, but still create positive cash flow. Put simply, even though the investor may be out of pocket month to month as income doesn’t cover costs, the property can produce additional cash flow through depreciation.
Because depreciation of property is an ongoing paper loss calculated by a formula, it is not money you are actually spending on the property. However, it still counts at tax-time as an expense that is added to what you have actually spent on holding the property throughout the year.
As a result total expenses increase, which increases your tax deductions and most importantly, your tax refund!
This means that for some investors, while a property is turning a loss on paper – that is, it’s ‘negatively geared’ – it can still generate positive cash flow through depreciation.
Below is an example of where a property is negatively geared. Before claiming depreciation the investor is out of pocket -$159.75 every month. By claiming for depreciation (increasing written down expenses) the property makes a greater “on paper” loss and generates a larger tax deduction for the investor. In this case the property becomes $192.66 per month cash-flow positive. The monthly cash flow position of this property has improved $352.40.
How do you claim for depreciation each year?
Claiming for depreciation each year is really simple. You just need to have a quantity surveyor complete a depreciation schedule for you.
A depreciation schedule calculates the annual deductions you can claim for building and asset depreciation every year. You should only need to buy a depreciation schedule once as it has all the deductions forecast for up to 40 years. You simply present this depreciation schedule to your accountant at tax time and they will apply the depreciation figures for you. If you do your own tax, then you can apply the figures straight from the report into the ATO tax return tool.
Why you need a quantity surveyor to calculate your depreciation
Depreciation is calculated off the construction cost of a building and the values of the included assets. Individuals and accountants are not qualified to estimate construction costs or value assets. Quantity surveyors are one of the few professions recognised by the ATO as qualified to estimate and value these costs. Quantity surveyors who are depreciation specialists know how to maximise the deductions for your property using up to date valuation methods and application of relevant taxation legislation.
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 on 1300 922 220 or get a free, no obligation estimate by clicking below.
Capital Claims Tax Depreciation are quantity surveyors and rental property depreciation specialists. We assist investors Australia-wide from our offices located in Sydney, Melbourne, Canberra, Brisbane, Perth, Hobart, Newcastle.