Rental property depreciation is the cost of buying or improving the property which results in lower taxable income.
The depreciation is calculated only on the building that is in use and not on the land on which it is built.
It is advisable to connect with reliable taxation accountants for calculating the depreciation on rental property.
Let’s understand the basic factors taken into consideration while calculating the depreciation:
A.Identify the basis of the property:
Basis of the property refers to the amount paid in cash while buying the property.
It also includes some settlement fees, closing costs such as legal fees, title insurance and any amount that the seller may owe to the owner.
B.Basis of the house:
The basis of the house is determined by the basis of the property including house plus land and the value of the land.
C.Separating the costs of land and building:
The cost of building is only depreciated. Determine the value of land as well as building to identify the correct amount.
First of all, identify the fair market value of the land as well as building. Based on this value, you can identify the value of depreciation.
Any adjustments in the basis:
Adjusted basis means either to increase or decrease the value based on certain events during the duration from buying the property till the time it is rented.
Any additions to the property are the increases and deductions in the value are the decreases such as damage, theft or uncovered losses.
An appropriate value can be calculated based on the above mentioned factors.
Now, the system can calculate the depreciation in two ways:
- General depreciation system or
- Alternative depreciation system.
To know which system is best suitable to calculate rental property depreciation, you must get the advice from a qualified tax accountant as the one available with PnD accountants, Melbourne.
Way forward:
Rental property depreciation is a topic which can be discussed in detail considering its various parameters. For now, we have discussed its calculation process.
We will surely discuss the other aspects in our upcoming blogs. Stay tuned…
