Depreciation is an
allowance for tax purposes to take account of the fact assets used in deriving
income such as obsolete furniture and wear and tear of items, even though they
are maintained and repaired. This process of reducing value is practiced for
tax purposes by allowing a deduction against income for depreciation for the
time the assets are used in earning income. Rental property depreciation works
for your benefit while you are renting out your property where it reduces your
taxable income and overall tax liability. But because you must decrease your
basis each year by the amount of rental property depreciation you take you will
be hit with a large tax bill and if you decided to sell your rental property.
As for rental property
investor, you may use two different types of depreciation:
- Capital works deductions
If
your residential property commenced construction after 15th September 1987, you
will be able to claim depreciation for the buildings structure which includes structural features.
- Plant and equipment
Regardless
of when your investment property was constructed, you can claim a tax deduction
for the decline in value of removable assets such as carpets, blinds,
dishwashers and stoves. The deduction you receive will be based on the
effective life of the asset, as set by the Australian Taxation Office.
Sydney rental property depreciation is widely used by real estate investors to deduct the costs
associated with purchasing and improving an investment property. Rental
property depreciation happens over the course of the property’s useful life and
it covers major repairs that are capitalized, but you can’t use it to offset
the cost of rental property normal wear and tear. It only covers purchase and
improvements, and there’s often a limit between what is considered an
improvement and what is considered a repair. Experts strongly suggest that you
must consult with your tax advisor about whether something is an improvement or
a repair. More often, different approaches have been taken in respect of the
depreciation treatment of some items within a residential rental property. For
instance, questions have arisen as to whether items relating to the residential
property such as plumbing, piping, electrical wiring, internal walls, doors and
others are to be treated as part of the building or as items separate from the
building.
While the given
instances do not cover every possible item, they do give a practical application
of the tests to some items and the assets covered are:
•
internal walls
•
doors (inside and outside)
•
garage doors (part of the residential rental building)
•
any furniture built into the wall
•
kitchen and bathroom cupboards
•
wardrobes and cupboards that are not built into the wall)
•
carpets
•
linoleum
•
floor and wall tiles and floor tiles
•
curtains
•
blinds
•
heaters
Sydney rental property depreciation
is a way to expense the costs of your rental property over time and lower your
tax burden. Property depreciation is based on the type of property and its
useful life.
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