When investing in property, depreciation is one of the keys to property investment. One of the components of depreciation is the depreciation on the building.
How Building Depreciation Works
Now we’re able to claim two and a half percent of the value of that build every year for 40 years but when we’re looking at property, there are different types of property on the market. Each of those properties will offer a different build cost to land cost and different depreciable amount.
If we use, for example, $470,000, which is the average price in Adelaide in 2018, if we were to build a townhouse at 470,000, what we’re doing is we’re building a larger house on a smaller block. What that means is our land component drops down but our build component goes up, making it a greater depreciable cost.
When we’re looking at the house, the land component is bigger, the build component is that little bit smaller because we’re only building on one level rather than two. When we’re looking at the numbers of those, if we’re assuming $170,000 for land and $300,000 for build on this $470,000 townhouse, the deductions available to us each year for up to 40 years is $7,500. That equates to $2,587 per year back in tax.
By looking at the same price house and assuming the land at $230,000 then the build is $240,000, the deductions on that are $6,000 or tax back to us of $2,070 per year.
How To Get Tax Back Weekly
The way we want to get that tax back is on a weekly basis to help us run the property. We’re going to do that by doing a income tax variation form. What that’s going to mean for us is that this townhouse here is going to get us $50 a week back to help us run that property. The house is going to get us $40 a week back to run the property. If we’re looking at tax minimization and cash flow as a strategy, a townhouse can certainly be a good option when we’re looking at investing in property.
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