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Understanding Tax Depreciation On Rental Property

If you own property that you plan on letting out to tenants, it is in your best interests to claim rental property depreciation. Basically, rental property depreciation provides tax advantages by giving you a means to move into a lower tax bracket or get rid of any income tax bills. But without the right tools like a Melbourne tax calculator, things can get more complicated when calculating depreciation. Fortunately, with the right professional help and a bit of information, you can calculation your tax depreciation accurately. 

If you have not claimed depreciation on your investment property before, the following are some things to help you better understand it and what you can claim.

What Is Rental Property Depreciation?

As your property becomes through time, the structure and the assets within the building wear out, which means they depreciate. Fortunately, the Australian Taxation Office allows rental property owners to claim depreciation in a form of tax deduction. You can claim this tax depreciation under capital works and plant and equipment assets.

What are capital works?These deductions refer to claims for the wear and tear that happens to the rental property structure and the fixed items such as roof, doors, walls,etc.Owners of residential property investments that began construction after September 1987 are qualified to claim capital works deductions. For 40 years, these deductions can be claimed at a rate of 2.5% each year.

If your rental property was built before this date, make sure to ask about the depreciation deduction available because these buildings usually have undergone some kinds of renovations which may allow capital works deductions.

For capital works assets, use a tax calculator and keep all the following expense records over the 40-year eligibility period:

The cost

The date the work was completed

The date the work commenced

Details of the type of construction work completed

What are plant and equipment assets?These refer to the easily removable fittings and fixtures found inside a rental property. These include hot water systems, carpet, air-conditioners, blinds, and smoke alarms. Depreciation deductions for these assets are calculated according to their individual effective life as established by the ATO.

Keep all other property depreciation expense records, including the receipts for plant and equipment assets, for the life of the asset and for another five years after lodging your tax return.

How Long Does Depreciation Last?

The time when you can take depreciation for your investment property is referred to as the recovery period. This period lasts until the cost basis is depleted, including adjustments made. Therefore, if an investor continues to upgrade their properties, they can also adjust their cost basis continually. Make sure to use a tax calculator so you know what and how to calculate any changes. 

Depreciation Vs. Deductions

Deductions are your paid expenses that you can deduct from your income tax in the same year that you incur them. On the other hand, depreciation is a non-cash deduction, in which the total amount is amortized over time. This can reduce the taxable income of an investor by a maximum amount each year. 

For example, the replacement bulbs that you purchase for your property are considered an expense, while the new light fixtures you install and add value to the property are depreciable over time. 

Depreciation is a way to obtain the benefits of incurring an expense without really paying any additional out of pocket.Itbasically allows you take tax deductions on the decrease in value of real estate holdingsover time.

How Do You Calculate Rental Property Depreciation?

Find out how rental property depreciation works and can be calculated as you look to offset your taxable income. Note that the cost basis in a rental property is different from the actual purchase cost.

At purchase. The total capital expense of the property minus the land value on which it sits is the cost basis. When calculating this sum with a tax calculator, only certain items qualify as a capital expense like recording fees, legal fees, abstract fees, and seller debts. 

When improvements are made. to determine the adjusted cost basis, the costs of any improvements to the property are added within the year they are incurred.

Are You Required to Take Depreciation on Rental Property?

The answer is the law does not require you to depreciate your rental property. But you should know that it is a huge financial mistake if you opt not to depreciate your rental property. This is because property depreciation allows you to write off a percentage of your property value as a tax-deductible expense. You do not want to make the mistake of forgoing this tax saving benefit. 

So, what happens if you do not depreciate your rental property? The answer is you lose the chance to benefit from a massive tax benefit. When the times comes that you want to sell your property, you will still need to pay recapture tax depreciation, whether you have claimed depreciation during the time that you are the owner of the property or not. 

One of the reasons that property owners do not depreciate is because they have no idea how to claim depreciation or to use a tax calculator online. They are worried that they will make a mistake with their tax return. Being unsure and scared is understandable considering that depreciation can be complex. But know that you are entitled to claim this tax benefit and a tax specialist, or a quantity surveyor can help you during the process. 

Can You Skip a Year of Depreciation?

In such a case, you are not actually skipping property depreciation. What happens is that you are only postponing it to a period in the future when you decide to apply the depreciation. With this, you are carrying the losses of depreciation indefinitely. 

It means you are stacking the depreciation for a few years. This also allows you to choose a portion of your stacked depreciation and claim it in your chosen year. 

Ultimately, when you sell your rental property in the future, that depreciation will be your financial advantage, as it works in your favour. You are reducing your taxable income while increasing the profitability of your property.

Jack henry
Jack henry
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