28 Jun What is tax depreciation? – Brad Beer
Kevin: A couple of weeks ago, Brad Beer from BMT Tax Depreciation answered a question from Sonia. Sonia was asking about the depreciation schedules and how reliable they are as an estimate when you’re calculating the viability of a purchase. We’ve had a couple of calls following that from people wanting to know what tax depreciation is. How does it really work?
Brad Beer, I know this is a difficult task for you, but over to you.
Brad: Thanks, Kevin. Depreciation is a tax deduction for property investors. It’s related to the wear and tear of items within a property. The carpet one day is going to wear out, and you get to claim part of the cost or the value of that carpet as a deduction each year.
It also relates to other things in the building, including sometimes the building if it’s the right age. You get to claim a certain percentage of the construction costs each year as a depreciation deduction. Similar to your car: you buy it, it depreciates. If you use it for business, you get to claim some of that.
How it works as far as the rest of your tax is concerned as a property investor is you collect some rent from the property, then you have some expenses with the property – interest, rates, management fees, etc. If you are in a slightly negative situation there, and it costs you some money to actually hold that property, then you get to make a deduction against your other income for that loss you made against that property.
Depreciation is another tax deduction that will also go against your other income to increase the tax deduction, but you don’t actually pay it out. It’s a non-cash deduction. It means more deductions and, therefore, better cash flow on that property and more money in your pocket as property investors.
Many do get these other deductions but sometimes miss out on the depreciation because you don’t see it as much. You don’t pay it out, but it’s wear and tear. You get to make a deduction, and that means more cash flow for you as an investor.
Kevin: That was a pretty good summary, and you did that in a couple of minutes. It’s a very complex subject. I guess it would be fair to say if you want to know a little bit more about it, you should always be working with your accountant, Brad?
Brad: Absolutely. We’re one of the numbers in your tax return that’s very important. We work alongside the accountant to provide the depreciation part, because you relate to that construction cost, and the tax office accepts what we do. Talking to the accountant about the overall numbers is very important for making sure that particular number is done properly.
We actually visit the property to come up with these numbers to help maximize that deduction and take the risk away from the accountant because the tax office will accept our numbers, as well.
Kevin: This might be difficult for you to answer, but how many investors in Australia would actually currently be using depreciation schedules?
Brad: There are a lot of investors using depreciation, but a lot are not using it properly. They may have made a guess or their accountants looked after it with a guess or they may think because it’s an old property they can’t get any. Old property still gets it. A guess is not the best way to do it. It needs to be done properly.
When we’ve done some research in the past, we found that the best part of 80% of investors are not maximizing the deduction properly. What that means is you’re letting the tax office keep your money and use it for something else.
Don’t be one of those ones who actually has been missing out. You need to look at it properly so that you actually maximize those deductions and get the most out of that property that you’re investing in for the future wealth of your family.
Kevin: Check out the featured channel at Real Estate Talk that BMT Tax Depreciation maintains on our site. There is a lot more information there about it and the services they offer. There’s also a direct link straight through, so you can talk to Brad Beer and his team at BMT Tax Depreciation.
Brad, once again, thanks for your time.
Brad: Great. Thanks, Kevin.