Is building depreciation a good thing?

It depends on who you ask. Property spruikers who want you to buy their development will sell it as ‘the best thing since sliced bread’ a lot of the time because, for example, when you factor in the tax benefits you can achieve from depreciation with the regular deductions you can claim on expenses like interest costs, it can make the difference to have either a very slightly negatively geared property, neutrally or even positively geared property.

This sounds good on paper of course. It is possible to buy a new rental property with seemingly little out of pocket costs, however the important question to ask is why?

The reason depreciation is claimable against your tax position is because the tax office recognises that the building you buy depreciates in value. This is a really important point to digest. When you buy property it is usually with the objective of achieving price growth, but there are two things you are buying - the building and the land. If the building is depreciating, it is actually holding back the overall growth you can achieve. This particular point is quite complex, however in simple terms, if part of your investment is actually going backwards in value, it is not a good thing, which is a fact that is recognised by the tax office.

Even if this does not convince you, the kicker is that any depreciation you claim actually reduces your cost base, meaning the tax saved today, could be tax paid later down the track. To illustrate this, we’ll look at an example:

Property purchased for $500,000 inclusive of costs:

Assuming in year one $20,000 depreciation is allowed to be claimed against your tax position, your cost base is reduced to $480,000.

This means that capital gains tax will now be payable on all sale proceeds above $480,000, not $500,000, so besides the fact that the building depreciation may actually hold back the property price growth compared to median, it will also mean more tax payable later.

This does not mean you shouldn't claim it if you are eligible to it. You should speak to your Financial Planner or Accountant about this and how it relates to your particular circumstances. But it is not a great reason to make an investment in the first place.

Speak to one of our degree qualified advisers about how this relates to you.

 

 

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GENERAL DISCLAIMER:

The content of this presentation is intended to be general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should consider its appropriateness having regard to these matters or obtain relevant professional financial advice before making any financial decisions.  Examples are illustrative only. Each person should obtain any relevant professional financial, taxation and social security advice before making any financial decisions.