Understanding Property Depreciation
If you have rented out your home, then you are eligible to an annual tax deduction known as investment property depreciation. Simply put, depreciation is the decrease of an asset's value. An asset is anything that can be sold. Since your rental property is subject to depreciation, the taxman allows you to claim this loss in value in form as a tax deduction against your assessable income. This is referred to as property depreciation.
It is important that you claim property depreciation as it reduces your tax and increases your cash flow thus making it easy to manage your property. It is, however, important to note that investment property depreciation can only be claimed when you have rented out your property and not when you are living in it.
In Australia, the Australian Tax Office (ATO) provides two categories of assets that qualify for property depreciation. These are the capital works allowance (Division 43) and depreciating assets (Division 40).
Capital Works Allowance.
This refers to tax deductions made on the building structure along with its fixed assets. In layman terms, it is deductions on permanent fixtures in your rental property. Fixed assets are installations such as tiles, wardrobes, electrical wiring, and garages that cannot be easily moved. The building structure includes the roof, bricks, footings, and timber. Also included in this are the construction and building costs.
Depreciating Assets.
Depreciating assets are those that can be easily picked or removed from your rental property. They are commonly referred to as plant and articles. The ATO recognizes that these assets have different depreciation values and therefore has a register in which the depreciating values of various plants and articles are recorded. The ATO assigns depreciating assets an effective life. This refers to the period in which investment property depreciation can be claimed on a specific depreciating asset. It is an important consideration worth making before making any claims.
The calculation of investment property depreciation is technical and wrong calculations could either make you liable for tax evasion. Various changes have also been made in a recent amendment to the Depreciation Law. For this reasons, it is advisable to engage the services of a tax assessor when claiming investment property depreciation.
Investment property depreciation is an effective way to reduce the amount of tax you pay while increasing the returns on your rental investment. In Australia, you can claim deductions on depreciating assets or capital works allowance.
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