Depreciation deduction but no income

[The Chancer]

I currently have 2 IPs which overall have a neutral cashflow before tax however I have around $10,000 of depreciation I can claim against these two properties each year which will reduce my taxable income from my job which is good.

However my question is if I had no taxable income (I.e no job in the tax year - looking at having a gap year hence why I will have no job for a year or so) how would this depreciation be treated? As I would have a neutral property portfolio before tax then $10,000 of deprecation but no income to offset this against.

I suppose this would be similar to if say I had a neutral portfolio before tax with an income of $30k pa from a job but depreciation from my properties of $40k so I would have $10k more depreciation than income.

I'm sure it's a simple answer but just something that has crossed my mind while doing my tax return and thinking about future plans.

Thanks

The Chancer

 

[Propertunity]

You will have some tax losses that you can carry forward to use in future years when you start paying tax again.

 

[The Chancer]

Thanks for the quick reply Propertunity,

so it pretty much rolls over until I have an income to offset the loss against, kind of like a capital loss which rolls over until I make a capital gain.

 

[Paul@PFI]

This is also a very good example of a (rare) CGT problem...

If you choose not to deduct the expenses (you can do that) then the cost may increase the cost base of the IP. However.....The capital allowance adjustment on sale would still be required. The rule of law applying to cost base adjustments for cap allowances applies a "could have deducted" rule. You could have deducted the cap alowance but chose not to.

Claiming the loss is always better. It carried frd to the next tax year and if you have a full year of income would be a benefit at your marginal tax rate wheer the loss has a zero % marginal rate this year. The revenue loss can offset EITHER or BOTH income or capital gains.

BUT - You cant claim gift deductions or personal deductible super contributions if these add to a loss. But donation deductions do not have to be lost. I have a base of clients who are very generous - Tax strategies around donations can be found here. Donation deductions can be deferred and the tax period of deduction "elected" by completing some forms.

 

[Moneyman_85]

Sorry guys,

Just wondering how the $10k depreciation 'reduces' your taxable income?

Is the $10k just claimed as a deduction for the depreciation of the building and plant items?

 

[Terry_w]

Sorry guys,

Just wondering how the $10k depreciation 'reduces' your taxable income?

Is the $10k just claimed as a deduction for the depreciation of the building and plant items?

It would be an expense so your income would be reduced by $10k.

however it is a non cash expense - so you get to claim something you don't directly pay for.

 

[Moneyman_85]

So the $10k is sort of coming off the cost of buying the property's?

 

[Terry_w]

So the $10k is sort of coming off the cost of buying the property's?

The $10k is an expense coming off the rent you receive.

 

[Moneyman_85]

oh now im really confused Terry lol

I'll speak to my accountant when I see him

 

[Terry_w]

oh now im really confused Terry lol

I'll speak to my accountant when I see him

Its really simple, e.g.

$20,000 pa rent
$20,000 pa expenses such as rates, insurance and interest etc
---------
$0 profit before tax.

But there is an additional expense you can claim but not 'pay for': depreciation (and borrowing costs too).

So the figures become

$20,000 pa rent
$30,000 expenses
---------
-$10,000 profit (= a loss)

This $10k is taken off your other income

Previously you may have earned
$50,000 pa

but this figure now becomes a net taxable income of $40,000

Tax on $50k is x
Tax on $40k is y

tax savings is x - y = ??

The property was cashflow neutral before tax. ie it didn't cost you anything.

But after tax it is actually making you money as you save ?? in tax.

 

[Moneyman_85]

Ah ok,

So is this correct Terry:

So you don't 'recieve' the yearly depreciation figures, they are seen as an expense and then taken off your taxable income?

 

[Terry_w]

Ah ok,

So is this correct Terry:

So you don't 'recieve' the yearly depreciation figures, they are seen as an expense and then taken off your taxable income?

Yes. a non cash expense

 

[Moneyman_85]

Ah thanks Terry

And thanks for the detailed response too!

Sorry for the thread hijack aswell lol