Depreciation - how does it work?

Discussion in 'Accounting and Tax' started by Collector, 7th Oct, 2009.

  1. Collector

    Collector Member

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    I have received a depreciation report on a IP we just settled.

    I have no understanding on how depreciation works and am seeking some answers.

    I would like to calculate our cashflow position on this property - and do so I need to know where depreciation fits in.

    The report has 2 different values - Diminishing value & Prime cost.

    Am I correct in presuming that I decide on which one I use?
    What should I be considering in deciding which method?



    Where does depreciation fit in when calculating cashflow?

    Cost = $20,785 P/A
    Income = $18,720 P/A
    Depreciation = $7,373 Diminishing value or $5,892 Prime Cost (30/09/09 to 30/06/10)


    Thanks
     
  2. depreciator

    depreciator Member

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    All Depreciation Schedules should give you both menthods - Prime Cost and Diminishing Value.

    You choose which one you want to use, but once you head down one path, you can't switich.

    Prime Cost spreads the depreciation more evenly. Diminishing Value gives you more depreciation in the earlier years. You will notice this when you look at your Schedule. I'd say 99.9% of investors use the quicker method.

    Depreciation is just another tax deduction. The others are likely to be: interest payments, council rates, water rates, property management fees.

    Scott
     
  3. FletcherTax

    FletcherTax Member

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    As mentioned by depreciator, once you choose the method you cannot alternate.

    This decision is made based on your other income. ie. do you need the greatest deductions to reduce your taxable income now? If yes, then diminishing method provides higher deductions in the earlier years.
     
  4. Collector

    Collector Member

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    Thanks guys.....

    I've worked it out and re-calculated the cashflow:D

    Now to start looking for IP2