Novice investors have a simplistic view of making legitimate money from their investments. They look towards buying at lower prices and selling at higher prices. The difference between a buying and selling price is the profit, as any school mathematics textbook will tell you. This is the simplest way of making money from investments, for sure. But there is another very interesting concept called depreciation. If these investment property depreciation rules are understood and used wisely, it can help investors shield themselves from investment losses in bad deals. Alternatively, it can also help them improve their profits on a good investment.
What is depreciation?
The notion of depreciation is based on a simple concept which we all know. The value of anything reduces due to wear and tear as we keep using it. This is called depreciation and it is used for cars, machines, and even for houses. As property depreciation consultants will tell you, this concept can be used to your advantage if you are an investor.
What Conditions Must You Comply With?
Before you plan on claiming depreciation on an investment property, you need to familiarise yourself with some dos and don’ts. The first thing to remember for claiming property depreciation is that you must be the clear titleholder or in other words, the owner. This condition holds even if there is a bank mortgage on the property. This property must be income-generating for you or your business. There is another interesting element of the depreciation rules in force. The calculation of depreciation starts as soon as your property becomes available for rent. The date of the first advertisement for the rental of a tax depreciation investment property is important here. It is usually considered the start date for depreciation calculation. This is true even if the tenant is not fount immediately.
The Calculation of Depreciation
The first thing to know while calculating depreciation for any asset is the legal period for such calculation. Broadly, this corresponds to the estimated useful life of the asset. As per ATO guidelines, this period for a residential property is 27.5 years. Likewise, for a commercial property, it is 39 years. Appliances already fixed or newly installed in the property have a depreciation period ranging from five to seven years. There are several methods used for the calculation of depreciation. The most commonly used one is the Straight Line Method. The basis for this method lies in two assumptions. Firstly, that the asset has a fixed useful life, which we discussed above. The second assumption is that the reduction in the value of the asset takes place at the same rate over this period. What this means that the depreciation amount for each year would be the same. There are many other methods used, and they are chosen on the basis of specific characteristics of the asset getting depreciated.
Depreciation is an unavoidable occurrence for any asset you own, including property. But if you understand the depreciation rules for rental property, you can easily sweeten the deal by claiming your tax deductions for the depreciation your property suffers every year.