If you're buying to invest in property, shouldn't you be aiming to achieve good returns on that investment? If this is true, why do so many people become trapped by the big con of property depreciation?
• when it comes time to sell the property, depreciation needs to be paid back
• established properties can be purchased for less than the premium price of new properties and are often better quality properties
• depreciation benefits disappear if a buyer's income drops – buyers who experience a drop in income may be forced to sell and this drives down the value of other properties in a complex or area
• 'future' capital growth may never occur due to the amount of similar properties coming onto the market
• there is usually very little future potential for new property.
When used properly, depreciation can be used to offset losses and costs you carry until well chosen investments start to deliver good returns. The analysis below shows how buying a 'new' property for the depreciation 'benefits' can lead you into a financial minefield, and how depreciation can still be used effectively when purchasing 'existing' properties.
Comparable review – tax deduction
The following table summarises the returns for a 'new' property for a buyer on an annual income of $200,000. With a purchase price of $500,000, the table includes depreciation of the building and fittings, and adds strata fees as an extra taxable deduction. Total tax credit = $11,416 in year one.
The table below shows results for the purchase of an established property 40+ years old for the purchase price of $500,000. This table excludes depreciation of the building and doesn't include strata fees as a deduction. Total tax credit = $5,232 in year one.
Comparable – capital growth
By all means use depreciation if that's the best option for your needs, but look at the longer term view. Ensure you use good quality, unbiased information when making any purchase and consider all aspects of each purchase – don't just look at how much tax you will be 'saving' . . .because there's no doubt you'll be the one who keeps paying if this is the driving reason for your next property purchase.