Published on September 04, 2015

I’m amazed at the number of property investors who do not have a clear understanding of the cashflow position of their investment property portfolio. Many think they understand how the numbers work but when I ‘drill deeper’ I find gaping holes in their understanding.

Allow me to explain,

When your accountant prepares your tax return he or she will deduct the investment property expenses from the rental income as well as deducting the value of the depreciation to give you a final profit or loss.

Sometimes we speak with alarmed clients in a panic because their accountant told them that their properties are “costing them thousands of dollars”.

It’s important to understand that while it may appear to you that your investment properties are producing a big loss, depreciation is a non-cash deduction that costs you nothing!

From an accounting perspective depreciation produces a bigger (paper) loss which in turn gives a property investor a better tax break. That said, to know the true profit or loss position of your investment properties you need to add back the value of the depreciation.

Total rental income minus property expenses reveals your profit or loss. Depreciation is a non-cash deduction meaning the ATO allows this as a loss even though it did not cost you anything out of your pocket. This is  one of the attractions associated with investing in property.

When you purchase an investment property through MRD our goal is to help you understand each step in the process, ensuring you invest with eyes wide open. To this end we will prepare for you a complimentary cashflow analysis report that will give you an average weekly holding cost (or it could possibly be cashflow positive too).

This weekly figure will be an average given rates notices and body corporate fees (if applicable) etc are sent quarterly, not every week.

Let’s say you have investment properties that entitle you to reduce your weekly tax obligation by $100, or $5,200 a year. Your accountant can include that in your tax return at the end of the financial year or alternatively you can complete a tax withholding variation form that will result in the ATO sending written instructions to your paymaster to reduce the amount of taxes taken from your wages.

Some people prefer to wait until the end of the financial year before claiming back what their investment properties entitle them too, while others opt to have their tax varied to increase their cashflow in each pay cycle. If you are using an offset account against non-deductible debt (such as a mortgage on your family home), it makes a lot of sense to reduce the tax you pay along the way and have that money working for you. Speak with us if you are unsure whether or not you are maximising the opportunities available to you.

Real Life Example

Property portfolio

The above chart reveals the simple Profit and Loss as reported by an MRD team member’s accountant. It indicates  that the investment property portfolio cost $7,668.65 to hold over a 12 month period. However, this includes depreciation which in this (real life) case added up to $8,233.00.

Remembering that depreciation is a non-cash deduction, allowed as a loss by the ATO while costing the property investor nothing, we add that amount back to see what the real position was in this case.

The $7,668.65 tax loss on the investor’s tax return was actually $564.35 cashflow positive to the investor.  So this portfolio of three investment properties cost nothing to hold after all. It was in fact $564.35 positive before adding back the reduced income tax obligation that was owed to the investor because of the $7,668.65 tax return loss.

The tax deductions that we can add to the abovementioned positive cashflow position will vary from one investor to another, subject to what top marginal tax rate they fall into after taking the $7,668.65 ‘loss’ from the rest of their combined incomes.

So as i said at the outset, I’m amazed at the number of property investors who do not have a clear understanding of the cashflow position of their investment property portfolio. Just as it is in your line of expertise, there are many areas where we witness property investors making ill informed decisions that rob them of the full suite of benefits they otherwise could be taking advantage of.

It is important you have the right information to ensure you make wise investment decisions. Speak with my team of experts about your goals and your current position and allow us to assist you to progress on this exciting journey.

We have some amazing investment property opportunities right now, so if you’re in the market to buy don’t delay contacting us on 1300 883 854 or online here.

Partnering with you for your investment success,
Nick Lockhart