When
you are renting property to other people, it is a must to report the rent on
your taxes as income. However, you can deduct your rental expenses, which are
the money you spent as someone who are renting out a property. You are lowering
your tax obligation from your rental income. You can deduct many expenses in a
particular year that you spend the money. But, know that rental property
depreciation is different.
If
you are a first-time real estate investor, you need to know about depreciation
on rental property. For starters, it is one of the biggest advantages when
investing in real estate.
The
significant thing about having a residential rental property is that it gives a
steady inflow of rental income as you develop equity and the property
appreciates. Also, there are a lot of rental property tax deductions. You may
able to deduct rental expenses from the income of your rental property, which
can reduce your tax liability.
These
rental expenses can be property management expenses, repair and maintenance,
mortgage insurance, property taxes, and many others. But, rental property
depreciation is another major tax deduction.
One
big difference between depreciation on other asset and depreciation on a rental
property is the property value does not decline. This would be the case for any
other asset, for example, mechanical equipment or a car. Its value reduces with
use and time
On
the other hand, depreciation on rental property is about distributing its cost,
instead of assessing its value. Therefore, you will depreciate the rental
property while it stays in perfect shape. Typically, real estate property is
considered to increase in value over time.
Depreciating
Improvements
Aside
from depreciating the property cost, you may also depreciate the money that is
used on property enhancement. An improvement is different from regular repairs.
An improvement occurs when:
·
It
causes the property to new use
·
It
enhances the condition of the property
·
It
increases the value or usefulness of the property
Examples
of improvements of a rental property that can be depreciated are:
·
Building
a garage
·
Adding
carpeting
·
Installing
heating or air-conditioning
·
Purchasing
new appliances such as dryer, fridge, or dishwasher
·
Replacing
the roof
Real Estate Property
That Is Depreciable
·
You
can perform a deduction for Melbourne rental property depreciation, as long as the
property has these criteria:
·
You
are using a property as a rental property. The property produces an income,
either through rent or another source of income.
·
The
useful life is over one year. If it is not the case, you will deduct the whole
amount as a regular rental expense.
·
You
are the real owner of a property even if it comes with a lot of debt.
·
You
can determine the useful life of your property. It should wear out eventually. For
example, a house usually has a definable useful life as compared to a vacant
piece of land.
Investing
in rental properties is one of the most beneficial financial moves you can do.
But, in order to be successful in the real estate investment business, you
should understand how Melbourne rental property depreciation really works.
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