The tax law allows investors to choose between two methods of claiming depreciation on the fixtures and fittings in an investment property whether residential, commercial or industrial.
These two methods are the diminishing value and the prime cost methods.
Every property investor is likely to have a different investment strategy which also may differ from property to property, so it is important to understand how the choice between the two different methods of claiming depreciation will impact your cash flow.
It is important to realise from the beginning, that the diminishing value and the prime cost methods both claim the total depreciation value available over the life of a property.
However, the two methods use different formulas to calculate depreciation deductions achieving different short term and long term cash flow positions.
Under the diminishing value method, the rate is increased therefore increasing deductions sooner. The method calculates the depreciation based upon the reduced written down value remaining, so the tax deduction diminishes over time.
The prime cost method uses a lower percentage rate but is more consistent over time spreading deductions out more evenly.
Traditionally, an investor who is looking at holding a property for a shorter period of time would nominate a diminishing value as their preferred method.
Alternatively those who are looking to have a more consistent claim would nominate the prime cost method.
It is important to note that a property investor can only use one method to claim depreciation deductions. Therefore once a decision is made for a property it cannot be changed.
If you would like to discuss how the two different depreciation method would impact upon your personal tax situation, please contact Ellingsen Partners.