Whether your property investment strategy is more focused on capital growth or on income, there are some rules that hold fast when it comes to optimising your returns. Depreciation should equal capital expenditure (or thereabouts).
Let’s examine this further.
If the amount of capital expenditure is consistently lower than the depreciation claimed, it’s possible you’re letting your property get run-down, which means future income is likely to suffer. Put another way, if you let your property become run down, how can you expect the same rent returns?
Whether your property is a house, unit or commercial complex, chances are the ‘plant and equipment’ such as ovens, hot water systems, dishwashers, carpets and blinds will eventually need to be replaced. The more plant and equipment in your property, the more there is that will need replacing.
So a prudent strategy would be to do a bit of forecasting each year. Consider whether you’re likely to have a higher or lower taxable income the following year and any changes to tax brackets. With falling interest rates, you may be considering refinancing which would attract a penalty for early termination, but the fee upon termination is tax deductible. You may also consider prepaying deductible property expenses.
Why do this? Quite simply to get greater after-tax benefits for this financial year when they may be more useful. As they say, cash flow is king.
So don’t let the end of financial year tax benefits escape you. Act now to reap the benefits this financial year. But remember, each investor’s situation is different and for this reason it’s important to consult your accountant to determine your approach.