Are you a small business owner who is struggling to save money? Did you know that you could save with property depreciation? Ideally, real estate depreciation on a rental property can lower your taxable income. Consider that annually the government deducts your assets depreciation amount from the assessable income to determine the taxable income. If you invest in properties, property depreciation allows you to deduct the property’s cost from the taxes required to buy and improve the property over its useful life. As such, tax depreciation enables property owners to lower the taxable income in the process.
What Type of Property is Depreciable?
Rental property owners use depreciation to deduct the purchase price and the cost of property improvement from the tax returns. However, it is worth noting that the depreciation happens as soon as the property is ready for use as a rental. Also, you can only depreciate the value of the building and not the value of the land. In that regard, you have to separate the value of land from the value of the depreciable property.
Rented properties can be a depreciation expense, as can the improvements made to the property. However, property maintenance does not count towards the annual depreciation, so you cannot write off regular maintenance.
Here are important factors to keep in mind when determining the rental property depreciation:
- You must be the property owner. This is regardless of whether you borrowed a loan to purchase the property or you are still repaying the loan.
- The property should be put into income-generating use and not be your primary residence.
- The useful life of the property should be determinable.
- The property should exist for more than 12 months.
Note that you will not qualify for the property depreciation if you got rid of the property in the same year you purchased it. In that regard, wholesaling and house flipping does not qualify for property depreciation.
Tips to Maximize Cash Flow Through Property Depreciation
A smart way of investing in property is not just about capital growth and high rental yields but also maximizing cash flows. One of the strategies through which property investors can maximize the cash flow is through tax depreciation. Tax depreciation is the only deduction that can be subjective. Here are some essential tax depreciation tips to help property investors.
- Maximizing the Cost of Property Construction
When calculating the depreciation on a property, you must use the cost of constructing the property. Owing to the current economic status, many property buyers are buying buildings at reduced prices nearer the original cost of constructing the property. Therefore, the idea is making the most of the current market conditions and searching for properties where the actual construction cost is close to the current purchasing price.
- Do Not Assume You Do Not Qualify to Depreciate the Property Based on Its Age
Even properties built in the 80s may qualify for tax depreciation. Talk to depreciation professionals near you to break down the different categories and qualifications. You may be surprised to find more than 40% of the items or equipment qualify as tax-deductible expenses.
- Claim the Small Items and Low-Value Items
Experts advise that property owners deduct as many items as they can. Ifit falls under the set maximum value, you can write it off. Claiming all the items is a great asset pooling strategy for your business.
- Use an Experienced Depreciation Professional
For first-time property owners, preparing the depreciation schedulecan be a nightmare. It helps if you engaged experienced professionals. The move will save you time and effort, so you can focus on growing your business. It is helpful you hire a company that has years of experience in calculating property depreciation.
Do not bother with DIY property depreciation. Contact DEPPRO for professional solutions. We have experienced experts who can ensure you earn maximum income through property depreciation. Call us today for an on-site consultation.