Depreciation is a tax allowance for the wear and tear on your investment property. It is claimed as an expense against your rental income. The greater the depreciation claimed, the less tax you pay.
While property investment is a fantastic way to increase your wealth, many investors never fully realise the potential returns their property can offer. All types of investment properties benefit from having a depreciation apportionment completed, not just houses but also flats, apartments and commercial properties. The changes to depreciation regulations in 2011 left many, including accountants with the false impression there is no longer any value in claiming depreciation, but this is not correct.
A Valuit report will divide the value of your property into various IRD depreciation categories to help you:
- Maximise your depreciation claim
- Reduce the risk of IRD penalties
How it all works
The IRD allows you to run your investment property as a business. This means that you can claim the expenses incurred against the income received for it, in order to reduce tax liability.
Depreciation is an expense that can be claimed to reduce taxable income.
Let’s have a look at an example of how depreciation can improve your cash flow:
| Rental income of $400 per week | $20,800 |
| Less cash expenses (insurance, rates, interest, etc) | -$10,000 |
| Income before depreciation (physical income in your pocket) | $10,800 |
| Less non-cash expense (depreciation) | -$5,000 |
| Taxable income after depreciation (what the IRD taxes you on) | $5,800 |
Using this example, you can see that the end result will be that less tax is paid on the income received once depreciation is claimed.
Note that the actual amount of tax paid will depend on the type of ownership structure that is in place for the property.
In summary:
Depreciation is about providing you as an investor with additional cash-flow through reducing your tax liability.
To find out more about how depreciation can improve your cash flow, contact Valuit and request a full report today.
https://www.valuit.co.nz/
0508 4VALUE (0508 482 583)
Please Note: This is a guest blog post written for Positive Real Estate by Valuit.