By Simon Darby, Property Depreciation Specialist, Valuit.
Here in New Zealand, investment properties are a hugely attractive prospect. It’s a fantastic way to supplement your income and increase your wealth.
However, many investors never fully realise the potential returns their property can offer.
For anyone looking to invest in or who already has investment property, depreciation is something you need to be thinking about to ensure you’re making the best return.
So what is depreciation?
Depreciation is a tax allowance for the wear and tear on your investment property. It’s claimed as an expense against your rental income so the greater the depreciation you claim, the less tax you pay.
Why haven’t I heard of it before now?
After changes to depreciation regulations came in during 2011, many (including accountants) were left with the false impression that there’s no longer any value in claiming depreciation. It may be that it wasn’t mentioned to you when you bought a property for this reason. But there is definitely still value in claiming if you qualify and you could be losing out on additional income if you don’t investigate further.
What are the benefits of a depreciation apportionment?
Owners of all types of investment property should have a depreciation apportionment completed — not just houses but also flats, apartments and commercial properties. A report will divide the value of your property into various IRD depreciation categories and there are two main benefits:
- You maximise your depreciation claim
- You reduce the risk of IRD penalties
How does it all work?
The IRD allows you to run your investment property as a business. This means that you can claim the expenses incurred against the income you receive for it and thus reduce your tax liability.
To put things into perspective, here’s how depreciation could improve your cashflow:
Breakdown Per annum
Rental income of $400 per week $20,800
Less cash expenses (insurance, rates, interest etc) -$10,000
Income before depreciation $10,800
Less non-cash expenses (depreciation) -$5,000
Taxable income after depreciation (what the IRD taxes you) $5,800
In this example, you can see that the IRD will take into account your depreciation expenses and that amount therefore becomes untaxed.
Of course the actual amount of tax paid depend on the type of ownership structure that is in place for the property, but you get the idea.
Depreciation is a brilliant way of increasing your cash flow by reducing your tax liability. Wear and tear is commonplace in investment property but it can be less impactful on your income if you ensure the tax you pay is altered to allow for it.
You can estimate the depreciation on your residential property using this handy tool.
And to find out more about how depreciation can improve your cash flow, we would love to hear from you at Valuit. Contact me and request a full report today.
Simon Darby is an active property investor and has been in the industry since he joined Valuit 15 years ago. He is Christchurch-based but offers Valuit services South Island-wide. He travels to the southern regions every six weeks and has family in Invercargill which has always given him a close connection to this part of the country.
Valuit is New Zealand’s most experienced property depreciation specialist and is dedicated to ensuring investors receive maximum benefits and return from their investments. At Harcourts, we value this long-standing partnership and we work with Valuit to ensure our investors and landlords achieve the best results from their investment property.
For more information or advice for any of your real estate needs, get in touch with your local Harcourts branch.