The biggest mistakes investors make: Mistake number 9 – Forgetting about depreciation

Property depreciation

Successful property investing is easier than most people think. The mistakes that prevent most would-be property millionaires from realising their potential are predictable and easy to avoid. In this series of blogs, Den details each of the most common mistakes and how to ensure you don’t make them.

Mistake number 9 – Forgetting about depreciation

Depreciation is the process by which the value of a house’s building and fittings decrease as the house ages. The Australian Tax Office (and most other countries’ tax offices) allow you, as an investor, to claim this  depreciation in your annual tax refund. This depreciation can be quite significant, and it can be the difference between a property making you money, and one costing you money.

How much depreciation can you expect?

Depreciation depends on a number of factors including:

  • the age of the dwelling
  • the value of certain objects in, and features of, the dwelling
  • the type of depreciation you can choose (ask your accountant about this)
  • whether the depreciable item is fixed or not – a fridge, for example, is considered to have a higher % loss of value each year compared to, say, the external structure of a house

A new dwelling could attract a depreciation in excess of $10,000 in its first year, older dwellings can still give you a decent amount of depreciation and I’ve never known a dwelling that has zero depreciation!

So what can we learn?

A person who specialises in depreciation is called a Quantity Surveyor. Quantity surveyors can look at a property, its features and contents and give you a schedule which you can use in your tax return. Even older properties with very few “special” features can give your tax return a decent boost!

What can we do now?

Get in touch with a quantity surveyor and make sure you have depreciation schedules for each of your properties. Many surveyors offer guarantees to entice you to use their services but they shouldn’t need to – savvy investors know how important depreciation is for your weekly cash-flow.

Put simply, understanding depreciation, and doing something about it, will improve your cash-flow.

And we’d all love more cash each week!

Comments

  1. Don’t forget also that depreciation can be a double-edged sword … it means that if you want to take out a loan against the property in order to buy another one, the property may be worth less than you anticipated (unless the underlying land has appreciated).

    • Hi Paula, thanks for your comments. Interesting comments, in theory the building is decreasing in value, but in my experience I’ve never had property decrease in value overall and have only ever found depreciation to be a good thing for an investor in terms of improving cashflow by minimising tax. What’s your experience in the US been like?

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