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How important is Depreciation when purchasing IP

Discussion in 'Accounting, Tax & Legal' started by MarkP, 19th Feb, 2007.

  1. MarkP

    MarkP New Member

    Joined:
    12th Nov, 2005
    Posts:
    3
    Location:
    Sydney
    Hi all,

    I'm looking to purchase the next IP and i'm trying to determine, and hopefully give some weighting/priority, to the difference in depreciation tax benefit$ in purchasing a brand new IP over an ~10 year old IP.

    Criteria such as Rental Reality, location to amenities, coast and CBD are the obvious key value drivers, and I also beleive that you should Not purchase property purely for tax benefits.

    However with this said, does anyone have certain rules of thumb that they use to consider depreciation when purchasing IP's? (ie. must be brand new or no older than 5 years?) How much consideration should an investor in a high tax bracket give to depreciation?

    Interested to hear thoughts?:)

    Mark. P
     
  2. coopranos

    coopranos Well-Known Member

    Joined:
    11th Oct, 2006
    Posts:
    498
    Location:
    Perth
    Obviously an investor on a high tax bracket will get a better benefit from depreciation.
    Personally, I think the only factor depreciation should play is in affordability. Having a high depreciation allowance can be the cashflow difference between being able to afford a property on a week to week basis and not being able to (although if this is the case it is possibly a little close to the line). Other than that, depreciation is purely a bonus.
    Possibly a more important consideration regarding the age of the property is how much maintenance is required (again another affordability issue).
    These type of factors dont really determine how "good" an investment is unless they start to impact either your ability to keep the property or the negative cashflow is a significant percentage of your actual capital appreciation (ie no point losing $10k per year when your investment is only going up by $15k per year).
    If a normal property investment is a good one (ie delivers strong capital growth over the long term), it is good with or without depreciation, as long as you can afford to keep it in the meantime!
     
  3. kevinb

    kevinb Well-Known Member

    Joined:
    6th Oct, 2005
    Posts:
    51
    Location:
    MENAI
    I suggest that you visit the sommersoft.com.au and purchase the software available and plug in the figures. You may find the extra $25/week or so helps you get over the hurdle in maintaining an IP.

    Rgds

    Kevinb