About Rental Property Depreciations

Investing in rental property can prove to be a smart financial move. A rental property can provide a steady source of income while you build equity and the property appreciates. There are also tax benefits in rental property depreciation Brisbane. You can deduct your rental expenses from any rental income you earn, thereby lowering your tax liability. Most rental property expenses including mortgage insurance, property taxes, repair and maintenance expenses, home office expenses, insurance, professional services and travel expenses related to management which are deducted in the year you spend the money.

Rental property depreciation must meet all of these requirements:

• You own the property.
• You use the property in your business or as income-producing activity.
• The property has a determinable useful.
• The property is expected to last more than one year.

Three factors determine the amount of rental property depreciation Brisbane you can deduct each year: your basis in the property, the recovery period and the depreciation method used:

Determine the basis of the property

The basis of property is its cost: the amount you paid in cash, with a mortgage or in some other manner to acquire the property. Some settlement fees and closing costs, including legal fees, recording fees, surveys, transfer taxes, title insurance and any amount the seller owes that you agree to pay such as back taxes, are included in the basis. Some settlement fees and closing costs cannot be included in your basis, including fire insurance premiums, rent relating to occupancy of the property pre-closing and charges connected with getting or refinancing a loan: points, mortgage insurance premiums, credit report costs and appraisal fees.

Separate the cost of land and buildings

Since you can only depreciate the cost of the building, and not the land, you must determine the value of each to depreciate the correct amount. To determine the value, you can use the fair market value of each at the time you purchased the property, or you can base the number on the assessed real estate tax values.

Determine your basis in the house

Now that you know the basis of the property (house plus land) and the value of the house, you can determine your basis in the house.

Determine the adjusted basis, if necessary

You may have to make increases or decreases to your basis for certain events that happen between the time you buy the property and the time you have it ready for rental. Examples of increases to basis include the cost of any additions or improvements that have a useful life of at least one year made before you place the property in service, money you spent to restore damaged property, the cost of bringing utility services to the property and certain legal fees.

Rental property depreciation Brisbane 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 obligation. Of course, if you depreciate a property and then sell it for more than its depreciated value, you will owe tax on that gain through the Depreciation Recapture Tax. Because rental property tax laws are complicated and change periodically, it is recommended that you work with a qualified tax accountant when establishing, operating and selling your rental property business. This ensures you will receive the most favorable tax treatment and also help you avoid any surprises at tax time.