Short Run-Through on Rental Depreciation

As a landlord, depreciation is the single biggest deduction, like in Perth rental property depreciation. The method is deducting the cost of your property’s entire original price over a long period of time, knowing that your property lasts for more than one year but that it decays, wears out and becomes less usable.

In concept, Perth rental property depreciation is easy to figure out. First, find out what the property is worth when it was bought, called the basis, and then find out the depreciable life, called the recovery period. Finally, deduct a percentage of the basis each year in the recovery period.

What makes it complex is considering the details like knowing when to start depreciating, figuring out how much the property’s initial cost was for tax purposes and knowing how much to deduct each year.

Property’s basis

The first order is to determine the property’s basis. This is the total investment in the rental property for tax purposes. The total cost of investment is the purchase price of the property plus the other expenses with the sale, including transfer taxes and other fees.

The land is not depreciable because it does not deteriorate over time and is not depreciable and has to be deducted from the cost of the property.

The more the land is worth, the smaller the depreciation deduction.

Land value

The two most common method of determining the land’s value is using the property tax bill and the other is calculating the value of what it would cost to replace your property completely.

With the property tax bill, you can figure out a ratio between the real property and the land value. The bill already has the valuation of the land and the building together and for each. You divide the assessed improvement value by the total assessed value of the property.

Replacement cost

The other common method in determining the value of the land (and the depreciable value) is calculating what it would could to replace the property completely. You may need an appraisal on this or you can be on your own.

If you had to get a mortgage to finance the property, chances are you already have an appraisal that includes the estimated cost to replace the structure, and consequently, the land it stands on.

Recovery period

This is the length of time over which a property must be depreciated. This is the property’s useful life, for tax purposes. The recovery period resets when you buy the property and is unrelated to what a former owner may have already depreciated.

A property begins depreciation when it is placed into service rather than when you bought it. When it is available to rent, the property is considered placed into service.

Deduction amount

The property is depreciated using the straight-line depreciation which means the same amount is deducted every year.

Personal property (fridge, dishwashers, etc.) is deducted using the accelerated depreciation. This gives a larger deduction in the early years of the recovery period. This is the reason why many landlords choose to depreciate personal property separately from real property.

Claiming your Tax Deductions

The Perth depreciation schedule, like any depreciation schedule, is an important document needed in order that you can have a claim on tax deductions on your taxable properties. Many investors are not aware of the tax deductions based on the depreciation of these properties.

With this depreciation, you would need to organize a depreciation schedule during the purchase of the property so you can begin the claim of the tax break as soon as possible.

Depreciation

Basically, depreciation occurs when the item’s worth becomes less over time because it is used and eventually wears out. In tax deduction, depreciation is one method of allocating the cost of the item over the span of its useful life.

For instance, if your property has a value of $1,000 and has a ten-year life, you can claim a $100 against your taxable income for 10 years on that particular item. You are only allowed to claim depreciation on certain items against your taxable income.

Types

There are two types of depreciation tax deductions on which are allowed to claim.  The first one is depreciation on plant and equipments. The equipments are those items within the building (air conditioners, carpets, ovens, hot water heaters, etc.)

The other one is depreciation on buildings (called building allowance) which refers to the construction costs of the building (concrete, brickworks, labor, etc.).

Schedule

When making a tax claim for depreciation, you would need a report that identifies all the things you need to claim against your tax and the current value of each of these items. The report needs to separate all the different items into two categories listed, and showing that each item depreciates at a different rate.

Each of the properties is different from the others and will contain a wide variety of different items falling into their own categories. The amount of tax benefits you will receive depends on the tax property you bought.

(Property owners usually chose properties that will give them the most depreciation benefits.)

Getting the schedule

After you purchased a property, you need to have a property schedule soonest possible time. This action is actually to maximize your tax benefits having started the earliest time (when you bought the property) of the schedule.

If you haven’t gotten your depreciation schedule when you first bought your property, you can still get one now so you can begin the claim of your deductions.   

Quantity surveyor

When you buy a property, the assets within the property are not itemized. In addition, the government will not take your word for the value of the items. You cannot create a depreciation schedule by yourself.

You need to employ the services of a qualified quantity surveyor who will do the thorough inspection and identify what can be claimed and make valuations in order to create a depreciation schedule for you.

If you had bought a brand new property, the depreciation schedule is easier because the value can be easily determined. If you have an older property, things are more complicated which becomes the reason why you would need a reliable and qualified professional for the assessment.