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Navigating Tax Benefits in Real Estate: Smart Investment Strategies

When done right, property investing can be a great way to make passive income and just generally fast-track your financial goals.

Most investors know that this is done through capital growth and steadily increasing passive income.

But there are plenty of investors who still don’t know that you can increase your financial gains by reducing tax liability.

The fact is that there are a range of real estate tax benefits for property investors. But plenty of people aren’t capitalising on this money-making venture. 

Let’s take a look at some of the tax benefits of real estate investing, and how you can make the most of this great opportunity.

What is depreciation and why is it important?

As a property investor you’re essentially running a business. And like most businesses, you can claim expenses at tax time. 

A key expense involved in owning and renting a property is that the property is going to experience some wear and tear as investors inhabit that space. 

The good news is that, to offset this expense, the government provides an allowance for that decline in value. 

The costs involved in fixing up that wear and tear provides you with an opportunity for a tax deduction.

This helps with the after-tax cash flow of that property. 

This also provides an investor with the opportunity to turn a negatively geared property into a positively geared property (a strategy employed by some investors). 

In a world where interest rates are rising, it’s very easy for a positively geared property to turn into a negatively geared property. 

Depreciation is essentially a bonus to help you hold onto that property and minimise your tax!

Old Property vs New Property

There are plenty of people who say that it’s worth buying brand new property because of the huge depreciation on offer.

Generally speaking this is true. Newer properties will have more depreciation than an older property.

But do older properties offer depreciation benefits? How old is too old?

A property needs to have commenced construction after 16th September 1987  to claim depreciation as a tax benefit.

That being said, even if it’s an older property it’s still worth investigating the potential of depreciation.

If it’s built prior to that date but it’s also had renovations or improvements after 1987, you’ll be able claim on the structural portion of those improvements. 

Remember depreciation is a bonus, never a strategy. There are plenty of negatives that outweigh buying brand new property – so don’t let the promise of depreciation sway you in the wrong direction.

It’s important to focus on capital growth with the yield that your strategy requires. 

Calculating Depreciation

A tax depreciation schedule provides an official breakdown of the depreciation deductions you can claim for an investment property.

A depreciation schedule is carried out by a quantity surveyor. 

But many people want to know whether it’s worth getting an depreciation schedule for their property.

Before spending your money on quantity surveyors, you can get a general estimate of the depreciation value of the property. The simple way is to use one of the many free depreciation calculators online!

You can also contact a quantity surveyor to get a general estimate as well.

Of course, an official report will incur costs, but a good surveyor should be willing to give you an idea of whether it’s worth it for your property.

In the meantime, here are three triggers that can give you an idea of whether you’d benefit from a depreciation schedule: 

  1. You’ve bought a brand new property 
  2. The property is built after 1987
  3. The property has undergone renovations (usually around $40,000 or $50,000 of renovations to make a schedule worthwhile).

And if you do decide to go ahead with that depreciation schedule, make sure to find a quantity surveyor that will go the extra mile!

A good quantity  surveyor should carry out the necessary inspections and always be on the lookout for opportunities to maximise your deductions. 

Commercial Property vs Residential Property

 There is an increased interest in commercial property investment. But, is there any difference in commercial real estate tax benefits?

The first key difference is that the 1987 cut-off date only applies to residential real estate. 

Commercial property has different cut-off dates depending on the type of property. An office will have a different cut-off date compared to traveller accommodation. 

There are also different rates of depreciation depending on the type of property.

But the most important tax benefit difference revolves around property, plant, and equipment (PP&E) items. 

PPE is a company’s physical or tangible long-term assets, such as machinery, land, office equipment, furniture, vehicles and more! 

Since 2017, you can’t claim plant and equipment unless you buy a brand new property or install brand new assets. But that doesn’t apply to commercial property.

This means that commercial property can provide better returns than residential in the established market. 

For more of a general discussion on commercial property versus residential property, check out the video below!

The Bottom Line

There’s a great saying; ‘watch your pennies, and the pounds will take care of themselves.’ 

Small differences, changes, and savings, such as those available through depreciation benefits, can really make the difference over the long-term. 

It all adds up!

Don’t let those potential savings go to waste – make sure you take full advantage of tax benefits as an investor.

PK Gupta
Published: 03 Oct 2023


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