When an investor starts claiming depreciation, they can reduce their tax liability.
This is because depreciation essentially lowers their taxable income, meaning they may be able to put more more money back in their pocket at tax time.
For many investors, the additional savings depreciation provides them can help to reduce their loans faster, add more funds into an offset account, to put money towards a new car or a holiday, or to assist them with everyday expenses involved in holding the property.
As an investor, there are smarter ways to use the extra cash you will make from depreciation.
Here are just a few:
Pay off your debts
First things first, if you have any major outstanding debts, this may be a good chance to reduce or eliminate them. While a Financial Advisor can advise which debts you should be paying off first according to your own financial institution, things like credit card debts (which often have very high levels of interest) or personal loans could be a good thing to pay off or reduce.
Diversify your portfolio
Most Financial Advisors will tell you that diversifying is a great way to minimise risk and is important for long-term financial success. When you have a diverse portfolio, these different investments are likely to react differently to the same event. This means that if one area suffers, you still have a stake in another area that is growing. Ideally, this will offset significant financial losses.
For example, a residential investor might look to invest in shares, bonds or even venture into the world of commercial property.
Grow your portfolio
Most investors will stop at one property but if you have the means, you can experience greater returns by growing your property portfolio.
Carefully consider whether this works for your financial situation and fits in with your investment goals.
As always, do some proper research to ensure you’re investing in the right area and the right property to maximise capital growth and rental returns.
Boost your super
It’s never too early to plan for your retirement. If you’d like a similar standard of living once you retire, it’s likely you’re going to need to make some voluntary payments on top of what your employer pays.
This money is concessionally taxed, will generally be locked away until you retire and you’ll benefit from compounding returns over time.
Do some renovations on your investment properties
Is your investment property a bit run down, in need of some better appliances or just crying out for a fresh coat of paint? Well this is your chance to change that.
Using the extra cash from depreciation to improve your current property is a great idea, provided you don’t overcapitalise.
This could potentially boost rental returns and increase the overall value of the property.
Expand your business
If you’re a commercial property investor or running a business as the tenant, extra cash never goes astray.
Depending on how the business is performing you could use this extra cash to expand or invest in other parts of your business. For example, this may give you the funds to upgrade your business equipment or start expanding into a new area.
Consult with an Adviser
Please note that these examples are general in nature and do not take into account your personal situation. As always, you should consult with your Financial Adviser when making such financial decisions to determine the best course of action for your individual circumstances.