FOR centuries, property ownership has symbolised wealth and provided government a stable source of tax revenue.

We pay income tax, GST, capital gains tax, stamp duty, land tax and local government rates. Almost every level of government wants a share of the wealth generated through property ownership and investment.

As it's tax time again, we thought it appropriate to take another look at the tax deductions available to property owners and investors to reduce their tax liability.

The main tax deductions with significant dollar values are interest and depreciation. While most investors are familiar with interest deductions as a gearing strategy, not many maximise - or even consider - the available depreciation allowances.

Depreciation is essentially a tax deduction for property investors in recognition of the wear and tear cost of income-producing property. Similar to an interest deduction, it reduces your taxable income - and your tax liability.

However, it's different to an interest deduction, in that it's not a cash outflow. In another words, it's not an expense investors actually pay for. Instead of draining an investor's cash reserve, depreciation can help improve their cash flow.

Interest and depreciation work side by side to maximise total tax deduction. If and r example, if an investment property costs $500,000 to build and the investor borrows 80 per cent of the money, depreciation is still calculated on $500,000. In other words, using other people's money and claiming a tax deduction on it has a leverage effect.

To illustrate the effect depreciation and building allowance deductions can have on after-tax cash positions across different tax brackets, Napier & Blakeley analysed two different types of property investment and their after-tax depreciation benefits.

The first was based on a five-year-old commercial office building with a purchase price of $5 million, land value of $1 million and $500,000 income (please contact me if you know of such a high-returning asset!).

If no depreciation or building allowances are claimed, the after-tax income at the following tax rates would be:

• 45 per cent

• 30 per cent

• 15 per cent

If the available deductions are claimed, after-tax income is greatly increased:

• 45 per cent

• 30 per cent

• 15 per cent

For residential investors, after-tax cash increases improve on a percentage basis. In the next example, calculations were based on a $600,000 high-rise strata-titled apartment with a land content of $75,000 and an income of $500 per week, or $26,000 a year.

If depreciation and building allowances aren't claimed, after-tax income will be:

• 45 per cent,

• 30 per cent,

• 15 per cent,

If the available deductions are claimed, after-tax income is:

• 45 per cent -

• 30 per cent -

• 15 per cent -

Tax deductions vary by property type and are impacted by age and potentially, the purchase contract. If investors want to earn more cash from their investment, they can have their investments analysed to make sure they utilise available deductions.

Calculating depreciation and distinguishing the different types of deductions - building allowance (or Division 43 deductions) and depreciation allowance (or Division 40) deductions, building allowance (or Division 43 deductions) and depreciation allowance (or Division 40) deduction, for example - is complex.

It's important depreciation deductions comply with legislation (Division 40 and Division 43 of