| Depreciation Adds Value |
| Does this sound right? A taxpayer, Mrs Doug Cameron, with a property earning pre-tax 5% is likely to be much better off than Mrs No. I. Dear with a term deposit earning pre-tax 5%.
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The reason this will be right is that Mrs Doug Cameron doesn?t pay as much tax.
The depreciation deductions will shelter the net rents from tax ? or even eliminate the tax. Some recent acquisitions for a client of an ungeared property equated to a cash yield of 16% before tax. The after tax rental yield decreased after five years when a large portion of the depreciation has been claimed. Our article Property Depreciation Explained, explains more about particular depreciation types.
So if our two taxpayers above are both paying 48.5% tax, then Mrs Doug Cameron could be earning net 5% whilst Mrs No. I. Dear will be earning net 2.575%.
Not only that Mrs Doug Cameron has an investment that is growing in value and increasing its net return. In Australia over the last 100 years with only brief exceptions, capital growth has been sustained with rental growth following. There will be periods of correction (ie negative growth, but rarely negative rent) followed by growth in excess of inflation (CPI).
To some extent the deduction is given back as a capital gain when the property is sold.
But there is no doubt that today?s dollar is worth more than tomorrow?s dollar (or next decade?s dollar). Consider also that an investment is usually bought when taxable income is high (48.5% tax rate?) and might be sold after retirement when tax income is low (15 or 30% tax rate).
Compelling reasons to talk to your financial adviser and enhance your wealth creation plan.
6th-February-2004 |
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