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Depreciation & changing tax brackets

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  • Depreciation & changing tax brackets

    Hi guys
    with tax returns time fast approaching my wife and I are left with a dilemna, to depreciate or to not depreciate?
    Now I know the obvious answer is do it but we are in an unusual circumstance.
    because I am student and most of my income comes from a tax free scholarship, and my wife only works part time we are both in the lowest tax bracket. However later in life we will (hopefull) move up the tax bracket.

    Now the worry is if we depreciate now we are basically defering paying tax on some of our income till later (if we sell the place or transfer it to an LAQC) but right now we pay a low amount of tax, and later we will pay a significantly higher rate tax.

    So should we depreciate now and save money at this point, if we have to pay out a higher dollar value later?

    Cheers David
    New to property investing? See: Best PropertyTalk Threads for New and Old Investors And/Or:Propertytalk Wiki

  • #2
    Well.... here's some figures that might help you make your mind up... I assume you are on a lower tax bracket for 10 years and then sell when you are liable for 33% tax. Figures are rounded up.

    Property Value: 130,000
    Building value: 100,000

    Property Value @ 4% CG p.a.: $192,000 (A very modest capital gain)
    Total Depreciation @ 4%: $33500

    Tax Saved over 10 years: $6500
    Tax to repay on Sale: $11000

    Inflation adjusted at 3% over a 10 year period, the $11,000 you'd have to repay is about $8,200 in today's money.

    So, I guess your decision would be guided by whether or not you think the $6500 is worth that extra cost. I would tend to think that a bird in the hand is worth two in the bush and go with the "I can make that money grow enough to justify the expense" point of view...
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