Tyron Hyde says tax depreciation is one of the best ways to achieve cashflow affordability, especially in the midst of rising cost of living.
Ty is a successful investor, author, podcast host and the CEO of one of Australia’s oldest and most well-known quantity surveying firms, Washington Brown.
He joined KnowHow’s Bushy Martin on the Get Invested podcast to explain how to make the most of tax depreciation as a property investor.
What is tax depreciation?
Depreciation is a tax deduction claimed for the natural wear and tear of an income-producing building asset over time. After loan interest, it’s the second biggest tax deduction for property investors.
“Just like a tradie can claim the wear and tear of a ute against their taxable income, as a property investor you can claim the wear and tear of a property against your taxable income. Now there are two types of allowances that we’re talking about here. One is called the Division 43, which is the building allowance, which is the structure. So this is the bricks, the concrete, the roof and the windows. This stuff is going to wear longer than what’s called the plant equipment, which is the ovens and dishwashers. So it makes sense. Bricks are going to last longer than an oven, right? And so the government has worked out that they should be in two different categories,” Ty said.
“And so what we do is we work out what the proportion of the structure is, there might be say 85% of the construction cost, and you as an investor get to claim that at a flat rate of 2.5% of the original construction cost per annum. So it probably costs 200K, and you would get five grand per annum.
“The other part is the plant equipment. You claim the oven, the dishwasher, the blinds, the carpet, all the bearing rates depending upon the item. So we split that into the report. So we split all those items out of the build cost and put them into individual categories, and the rest goes into a lump sum called the building allowance. And that gets claimed at 2.5% per annum of the original construction costs.”
How important is depreciation to property outcomes?
Ty explained the impact of tax depreciation on cash flow.
“People know a lot more now. I think if you don’t know about depreciation, you really should be getting some advice about it because it can affect your cash flow. Depreciation can turn a negatively geared property into a positively geared property, and that makes a big difference,” he said.
“So basically when you get a depreciation schedule, what we tell you you can claim reduces your taxable income. So if you’re paying tax on $100,000, and we give you a report that says you can claim $10,000 in year one, you should only be paying tax on $90,000. And the good news is, that $10,000 is what’s called a non-cash deduction. It’s the only deduction that you’ll get on your investment property that you don’t physically pay out for. It’s already in the property when you buy it. All you need is someone like Washington Brown to tell you what that figure is. So if you don’t claim it, you’re missing out on deductions and it helps your cash flow. So it is a vital part of the property investment equation, if you ask me.”
What are the mistakes to avoid with a depreciation schedule?
Ty revealed the two biggest mistakes property investors make with their depreciation schedule.
“A common mistake I see investors make is not getting a depreciation schedule. I’d say 99% of property investors can benefit from depreciation. There are cases now, because the laws have changed recently, where there are some properties that will no longer benefit you. So if your property is built before 1987 and had no renovations on it, which is pretty rare, then there’s nothing we can do anymore because you can’t claim the ovens and the dishwashers anymore or the plant equipment,” he said.
“The other common mistake I see, and I’ve actually been guilty of this myself, is to get a depreciation schedule, and I did this for a fit out. So say you got a fitout, and you’ve got the desk and chairs within that fit out, but you’ve removed them and you’ve changed them. But three years down the line, I see they’re still in the depreciation schedule. So when you remove those items, you should be writing off the balance of whatever was left there. So I would annually check as a property investor, are the things that I’m claiming still there, because if they’re not, well maybe you can get an outright deduction for it. So that’s the one thing I’d advise people to look at.”
Listen to the full interview here.
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