What is ‘depreciation’ and how can it help me? Investment terms explained
The word ‘depreciation’ is bandied about a lot and you may have noticed it being used more often around tax time.
This isn’t a surprise – depreciation is one thing that you can claim on your tax return every year to make your property investment’s overall cash flow a little bit better.
But what is it and how do you use it?
Think about depreciation like buying a new car. The second you drive it out of the car garage, as is often said, it has lost a bit of value. Over time, it further loses its re-sale value. This is a little bit like depreciation on property. Over time, your property depreciates. You may be thinking “but I am investing for the property value to go up!”. Correct. However, while land appreciates in value, the building itself and all your fancy carpets and paint slowly drop in value over time.
This is what is called ‘depreciation’. What this means for property investors is that you can claim back a portion of these losses in your tax return each year – without it actually being a loss directly from your pocket. You are best placed to have a quantity surveyor assess your property and create what is known as a depreciation schedule. This figures out, based on what is in your property (and any renovations that have occurred), how much it will depreciate by over its life span.
As a rule of thumb, brand new properties have more depreciation to claim – as they haven’t depreciated at all yet – when compared to an equal size and quality established property. These figures can range significantly, but have been known to be in the thousands of dollars.
Depreciation isn’t limited to property, although we’ll obviously discuss it in those terms. For instance, businesses who purchase a vehicle, or equipment, can also claim depreciation. Commercial property investors are also able to use depreciation.
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