How Depreciation and Tax Deductions Can Fund Your Next Investment Property

Savvy investors don’t just rely on rental income—they use depreciation and tax deductions to boost cash flow and power their next purchase.

The Power of Depreciation

Depreciation is a non-cash deduction that accounts for the gradual wear of a building and its fixtures. By claiming it, you reduce your taxable income and free up cash for reinvestment.

Key Insight

Applying depreciation and related deductions can turn a large pre-tax loss into a much smaller after-tax loss, generating ongoing tax savings you can funnel into new properties.

Year 1 Cash Flow Example

Rental Income: $42,638
Cash Expenses (Interest + Outgoings): $63,287
Pre-Tax Cash Flow: –$20,649
Tax Savings from Deductions: $15,039
After-Tax Cash Flow: –$5,610

Thanks to depreciation and deductions, your after-tax loss is far smaller than the raw pre-tax figure.

Long-Term Financial Impact

Non-cash deductions keep after-tax losses modest while rents rise over time.
By around Year 13, rental income typically outpaces expenses, turning cash flow positive.
A consistent $15,000 annual tax credit could accumulate about $75,000 in five years—enough for a 20% deposit on another property.

Understanding Depreciation Rates

Residential Building: 2.5% (ATO guideline)
Building Attachments: 2.75% (commonly used in analysis)
Fixtures & Fittings: Calculated via the ATO’s diminishing value method

Comparing Year 1 Costs

Building Depreciation: $11,825 (Non-Cash) – reduces taxable income
Fixtures Depreciation: $6,899 (Non-Cash) – reduces taxable income
Loan Fees: $3,862 (Non-Cash) – reduces taxable income
Interest: $50,544 (Cash) – reduces taxable income
Rental Outgoings: $12,743 (Cash) – reduces taxable income
Total Deductions: $85,873

Conclusion

While initial pre-tax cash flow may look poor, depreciation and other tax deductions dramatically improve your after-tax position. Those savings can be set aside or used as a deposit for your next investment. Always confirm your depreciation schedule with a qualified quantity surveyor and leverage these strategies to grow your property portfolio faster.

Discover the #1 tax secret wealthy Australian property investors use to grow their portfolios faster — even in a high interest rate environment.

Learn how to turn wear and tear into wealth
See real examples of $15,000+ first-year deductions
Understand how to structure your purchases for maximum after-tax ROI

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