If you’re a new property owner or you’re thinking of buying in the near future, you have probably heard people talking about tax depreciation. But, what is tax depreciation and how does it relate to the property? How exactly does tax depreciation benefit you as a property owner?
Take a look here for everything you need to know about tax depreciation and how you can save thousands of dollars.
What is tax depreciation?
At its most basic, depreciation is the wear and tear that occurs to a property as it ages. Even if the value of the property increases over the years, from an accounting perspective, the building and fixtures will still diminish and display wear and tear, thereby decreasing in value. This wear and tear in a building or property is called tax depreciation and is claimable as a tax deduction.
What can you depreciate?
Tax depreciation is claimable on both residential and commercial investment properties.
There are two main categories that you can claim a tax deduction on:
1. Capital works deductions
Capital works deductions can include the structure of the building, as well as permanent fixtures attached to the building such as cupboards, sinks, windows, bathtubs, doors, air conditioning, brick and mortar and other such fixtures. Capital works will often make up approximately 85-90% of your tax deduction claim.
2. Plant and equipment depreciation
These include items that can often be easily be removed from a property. Think carpets, blinds, security systems, hot water systems, office chairs or commercial ovens. In both commercial and residential properties, these are the assets that have a limited effective life and will decline in value over time.
How evaluating a property is related to the depreciation value?
Depreciation can also impact the valuation of a property. Using the cost approach, appraisers can estimate the property value by looking at the value of all of its components (including the structure, land and the depreciated value of any improvements that may have been applied).
The following calculation provides an accurate valuation of the property: property value = cost new – accumulated depreciation.
How tax depreciation benefits you at the end of the financial year
Tax depreciation benefits you in a number of ways at the end of the financial year.
Claiming tax depreciation on your investment property reduces your taxable income, which means you’re going to end up paying much less tax. This can save you a lot of money at the end of the financial year. It works by applying the depreciation against the property income to reduce the overall income of the property, potentially saving you thousands of dollars.
Depreciation of your property and its fixtures can end up benefiting you as a property owner. They help to offset the tax you can expect to pay at the end of the financial year and can end up saving you a fair chunk of change.
If you need professional assistance with your tax depreciation calculation, get in touch with Peterson Property Valuations. We’re the experts you need on your side.