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.