Before we dive into the details about property depreciation, it’s very essential to know the real meaning of the term ‘depreciation’. Depreciation can be termed as the process through which the costs of improving and buying a property is deducted from the taxable amount of a property owner’s income.
In depreciation, you don’t take one, single large deduction at a time. Rather the deduction is divided into equal parts for a limited number of years - which extends up to the useful life of the said property. There are very specific rules that property owners need to follow when charging depreciation - because overcharging or under-charging is an illegal offense, in the eyes of the law.
The Kind Of Property That Is Depreciable
It has been mentioned in the law that if you own a rental property and if that property meets all the following requirements, then only you can charge depreciation on it:
Moreover, fulfilling all the above requirements will not automatically make your property eligible for depreciation. You have to make sure that the property is used for business or earning income-related purposes throughout the year and not less than that time. The reason is that land is not a depreciable asset. Furthermore, you can't add the costs of landscaping, clearing, planting as a part of the land cost.
The Starting of The Depreciation Process
You can start charging depreciation when you start using your property as a way to earn income. For example, you constructed property on March 27, 2019, and you had put it on rent on April 27, 2019. On May 27, 2019, you found a tenant and the tenant's rent period starts from June 1, 2019. Therefore, the depreciation should start from April 27, 2019. In case you're not sure about the same, you can take help from building consultancy Service Sydney.
Depreciation can be charged until one of the following requirements is met:
Depreciation can be charged when the property is kept idle. For example, your earlier tenant left your property and you’re performing repairs on the same. Till you get another tenant, you can still charge depreciation.
The Method Of Depreciation
There are certain factors that will determine the amount of depreciation that you can deduct every year. These factors are:
Furthermore, the following things should also be kept in mind when calculating depreciation:
Furthermore, you can also include the utility fees, costs to restore the damaged property and also various legal fees as well into this total depreciable amount.
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