Depreciation is one of the biggest tax deductions available to property investors. It allows you to write off a portion of your investment in an income-producing asset over its entire useful life, which accounts for natural wear and tear as well as any upgrades or repairs made. In order to take advantage of this benefit, it is important to understand what exactly can and cannot be depreciated. This article will outline the various items you can include in your depreciation schedule and the methods used to calculate them.
In general, you can’t claim the full cost of an investment property in the year you purchase it. Instead, you must spread the cost over its deemed effective life (typically a number of years). To be eligible for this deduction, the property must be held for investment purposes and it must meet certain other requirements. It must also be an eligible depreciable asset, which includes a commercial or residential rental building, permanent fixtures such as kitchens and bathrooms, as well as plant and equipment. See more https://www.acompanythatbuyshouses.com/sell-my-house-fast-euless-tx/
The ATO lists around 6,000 different assets that you can depreciate, and each of them has its own effective life. In most cases, you can’t depreciate the land itself, but you can depreciate the improvements that are made to the site. Improvements such as installing a new roof or paving can be depreciated, but a swimming pool or air conditioning system wouldn’t qualify.
A quantity surveyor can prepare a comprehensive depreciation schedule for your investment property and will help you determine which assets have the longest useful life and which ones should be claimed at a faster rate. There are a few different ways to calculate investment property depreciation, but the most common is the straight-line method. This assumes that an asset’s value will decline evenly over its entire life. Another method is the double declining balance, which enables you to claim more at the beginning of an asset’s life and less in later years.
It is also important to remember that any accumulated depreciation must be recaptured upon sale. This means that if you sell your property for more than its original cost basis, you will be required to pay capital gains tax. However, you can avoid this by conducting a 1031 tax deferred exchange or leaving your property to your heirs.
It’s important to hire a professional before you purchase an investment property to ensure that it meets the IRS’ requirements for depreciation. Inspectors like those at InterNACHI are trained to uncover a range of defects, from structural issues to pest infestations that may affect your eligibility for depreciation benefits. This will save you time, money, and hassle in the future by identifying any problems that may need to be addressed before you can begin taking advantage of tax benefits such as depreciation. A thorough property inspection can also uncover any safety issues that you should address before renting out the space. This can protect you from lawsuits and fines in the event of a tenant injury.
