Another key tax deduction—namely the allowance for depreciation—works somewhat differently. Depreciation is the process used to deduct the costs of buying, maintaining and improving a rental property. Rather than taking one large deduction in the year you buy (or improve) the property, depreciation distributes the deduction across the useful life of the property.
The Australian Tax Office (ATO) has very specific rules regarding depreciation, and if you own rental property, it’s important to understand how the process works.
Which Property Is Depreciable?
According to the ATO, you can depreciate a rental property if it meets all of these requirements:
- You own the property (you are considered to be the owner even if the property is subject to a debt) IE Mortgage held by a bank due to finance used to purchase.
- You use the property in your business or as an income-producing activity.
- The property has a determinable useful life, meaning it’s something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
Note that land isn’t considered depreciable since it never gets “used up.”
Depreciation can be a valuable tool if you invest in rental properties, because it allows you to spread out the cost of buying the property over decades, thereby reducing each year’s tax bill. Of course, if you depreciate property and then sell it for more than its depreciated value, you’ll owe tax on that gain through the depreciation recapture tax.
Because rental property tax laws are complicated and change periodically, it’s always recommended that you work with a qualified tax accountant when establishing, operating, and selling your rental property. That way, you can be sure to receive the most favourable tax treatment and avoid any surprises at tax time.
For more information on depreciation and its benefits arrange a meeting with one of our financial planners and accountants today…
