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Depreciation and Cashflow: A Property Investor’s Essential Guide by Mike Mortlock of MCG Quantity Surveyors

From a property investment purchasing point of view, tax depreciation should be low on your priority list. However, from a cashflow point of view, there’s not much challenging it on the podium!

 

 

1. What Is Depreciation and Why Is It Important?

 

Depreciation and cash flow

Why is depreciation important? Well, take our client’s average 1st year depreciation deductions of $9,414 as an example. If you are earning $100,000 p.a., these deductions will net you $3,483 in your back pocket each year. Now I will have to do the annoying; “This is intended as a guide only and you should seek accountant’s advice” thing but from a cashflow perspective, those deductions are giving you $67 a week.

 

How Depreciation Benefits Your Cashflow

Depreciation helps to lower your taxable income, meaning you’ll pay less tax. For property investors, this translates into more money in your pocket. With deductions like these, it’s easy to see why depreciation is considered a powerful tool for improving your property’s cash flow.

 

 

 

2. Understanding Depreciation and Cash Flow in Property Investment

 

When investing in property, the cashflow is a balance of the rental income coming in each week, and the expenses going out. Now that analysis is certainly not going to win me a Nobel prize in economics, but investors frequently underestimate the expenses of investing in property. For example, there is;

  • Property Managers Fees
  • Council Rates
  • Strata Fees (if in a complex)
  • Maintenance expenses
  • Smoke Alarm checks
  • Services
  • Accountant fees
  • And of course, the mortgage!

 

The Hidden Costs of Property Investment

It adds up, and what seems on paper like a lovely little neutrally geared investment, can certainly start having you chip into your back pocket to keep it running. That is where the true value of depreciation is. It is an essentially an on-paper loss that minimises your taxable income, improving your overall cashflow.

 

Maximising Cashflow with PAYG Variations

Many investors utilise PAYG tax variations to estimate their tax payable weekly, helping them to get a better handle on the ongoing costs of the investment.

 

 

 

3. How to Take Advantage of Depreciation in Your Investment Strategy

 

So now that we know its property investing’s golden-haired child, what do you actually need to know about depreciation? I will zero in on the ‘need’ part here. What you need is a quantity surveyor to estimate the potential deductions for your property. We have always done this free of charge and with as little as a property address, we can see whether it’s worth paying for a report or not.

 

3 Key Triggers to Benefit from Depreciation Schedules

1. The property is brand new, or

2. The property was originally constructed after 16th September 1987, or

3. The property was constructed pre-September 1987, but it has been substantially renovated to the tune of $40,000 or more (think bathroom and kitchen renovations, reroofing, extensions etc.).

 

 

Depreciation

 

Conclusion

You’re welcome to dive neck deep into the million or so articles I’ve written about the nuances of construction, depreciation, legislation and so on, but armed with the basics, you can take full advantage and ensure you’re not missing out.

 

Mike Mortlock is the Managing Director of MCG Quantity Surveyors and is an industry leader in tax depreciation. Mike has worked as an expert depreciation consultant with several major firms such as McDonalds, CMC Markets, Deloitte, PwC and more. He has completed thousands of depreciation schedules for commercial and residential property and is in demand as a public speaker and property commentator having been featured in The Financial Review, ABC Radio, Domain, Real Estate.com, Sky Business and other print and radio publications.

 

 

 

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