Understanding Rental Property Depreciation

Real estate depreciation refers to an income tax deduction of a taxpayer that lets you recover the cost or other bases of the specific property that is put into service by the investor. Depreciation is a non-cash deduction that cuts down the taxable income of an investor. Many investors call the Brisbane rental property depreciation a phantom expense as they are not really writing a check. It is only the Australian Tax Office allowing them to take a tax deduction according to the perceived reduction in the real estate value.

Due to wear and tear, real estate depreciation predicts that the rental property is declining over time. However, it is not necessarily the case. Not many other types of investment give comparable depreciation deductions. With real estate depreciation, you may have cash flow from the property but may appear as a tax loss. The benefit is to lower the overall tax liability, which can help real estate investors save a lot of money every year on their taxes.

Kinds Of Investment Properties You Can Depreciate For A Tax Deduction

To qualify for depreciation, the property has to meet certain requirements. As a real estate investor, meeting the following criteria does not have to be difficult. The property is used in a business or profit-producing activity. If the property is used for personal purposes or for business, you can only deduct depreciation according to the business use of that property. The taxpayer should own the rental property and may depreciate any capital improvements for the property that they lease as well. The property should have a determinable beneficial life of over a year.

A Closer Look

Know that land is not depreciable. But, if you have rental real estate, it is possible to depreciate the building, major improvements, and any equipment that you use in the property. Rental property depreciation begins when a taxpayer places the property in service and ends when the property is disposed of or has stopped giving service. Any depreciation that was taken will decrease the basis in the property. Upon property disposition, this recaptures depreciation.

How to Calculate Depreciation

The calculation of property depreciation is not quite hard. You may calculate using 3 steps:

Real estate value consists of land and building values, but depreciation applies only to the building. The initial step is to allocate the purchase price of the property should be allocated between the building and land value.

Considering that the land is not subject to property depreciation, the building would be depreciated over the prescribed useful life of the Tax Office. This life is designated as 39 years for commercial property and 27.5 years for residential rental property. To obtain your depreciation expense, divide your building value by 27.5.

To get your property tax savings from real estate depreciation multiply the depreciation expense by the marginal tax rate.

Real estate depreciation is an essential tax deduction for real estate investors. A real estate investor must understand the fundamentals of rental property depreciation. This will help you with tax planning and know more about after-tax investment returns.