21 Feb Readers' Questions: Will claiming depreciation on an investment house lower the value of the house in the ATO’s eyes?
In today’s show we answer a question from Wayne. He asks Brad Beer, from BMT Tax Depreciation, if claiming depreciation on an investment property will lower the value of the house in the eyes of the ATO.
Kevin: We’re going to answer a question now that came in from Wayne Mundy from Toowoomba. Thanks for the question, too, Wayne. Joining me to answer is Brad Beer from BMT Tax Depreciation.
Good day, Brad.
Brad: Hi, Kevin.
Kevin: Good to be talking to you again. I’ll just quickly read Wayne’s e-mail. “I’m only just starting out in my real estate journey and have heaps of questions, but one main one that I have is will claiming depreciation on an investment house lower the value of the house in the ATO’s eyes and is there an increase in capital gains tax when it’s sold? I’d appreciate your insight into this matter.”
What have you got to say about that one, mate?
Brad: Firstly, Wayne is reading and learning a lot, which is really impressive. That’s great. If you’re starting out in your real estate and investing journey, it’s always good to do that. The depreciation that you do claim, yes, has an impact on some of the capital gains tax you do pay at the end. Capital gains tax is a tax you pay if you sell at some point and the claims that you make on some of the depreciation will have some effect on how much capital gains tax you do pay.
The thing is that when you make depreciation claims or claims against the capital allowances on your property on the way through owning it, you get to put the cash in your pocket straight away and you get to make those deductions at your full marginal rate.
If or when you do actually sell the property, yes, you’ll pay capital gains tax and it will be an increased capital gains tax based on some of those claims, but you’ll pay capital gains tax at half of your marginal tax rate at the time when you sell the property.
The thing that really happens when you do calculate those two numbers is that you end up paying some additional capital gains tax but it’s less than deductions in the money that you probably put in your pocket otherwise really normally.
I’ve run some case studies on that in the past – probably good to get on it and read or I can provide that if you ever want them – on what happens if I am in this situation, what do the numbers look like? Your numbers will be different to the case studies, but you get an understanding of what the numbers do mean and exactly how the numbers are calculated by having a look at some case studies. Absolutely.
Kevin: Brad, if anyone listening wants to get hold of those case studies, how can they contact you or how can they access those?
Brad: Look, in our Maverick newsletter on the web site, they’ll be available. If not, feel free to e-mail myself or the office at bmtqs.com.au, and we’ll be happy to oblige.
Kevin: Wonderful. Are you noticing, Brad, that more and more people are staring to understand the depreciation message and doing depreciation schedules on their properties?
Brad: It’s almost like our whole business is almost an education business for investors on depreciation. I actually spend more time educating than anything else about what depreciation means and what the numbers are.
I think depreciation is an important part of investing. It’s not the reason you buy certain properties, but it is something you need to understand. It really comes down to you should crunch your numbers on properties before you buy them. You should know what will it cost pre- and post-tax for me to own this particular property? What does it mean for me to have it?
Also, understanding some of the implications when you do sell a property of what the capital gains tax implications are is a good thing to do. So any number crunching and knowledge you have before you invest in a property is fantastic, and I’m glad to see that’s happening.
I’m still shocked all the time by the amount of investors I speak to who probably don’t understand the necessities of things like depreciation on the way through, but yes, definitely in my 17 years, they’re way better than they were when I started.
Kevin: Indeed. There’s a lot more information, too, about Brad and his team at BMT Tax Depreciation on our web site, RealEstateTalk.com.au. Just click on the link there, you’ll see all that information.
Wayne, thank you very much for your e-mail. We’re going to make you the e-mail question of the week and as such, you’re going to win a 12-month subscription to Australian Property Investor magazine. I’ll be in touch with you and we’ll get your details and make sure that you’re in line to give the next one.
By the way, too, if your question is chosen, as was Wayne’s, and you are already a subscriber to API, don’t worry. We will extend your existing subscription by a further 12 months with our compliments and with the compliments of Australian Property Investor magazine.
Wayne, I’ll be in touch and it will be on its way to you.
Brad, always great talking to you, mate. Thank you very much, and we’ll catch you again soon.
Brad: Excellent. Thanks Kevin.