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:

  • You are the owner of the property.
  • The property is being used to earn income or used for an activity that relates to business.
  • The useful life of the property can easily be determined.
  • The property is expected to last more than one year.

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:

  • All the costs of owning the property have been deducted.
  • The property is stopped to be used as a property used to earn income.

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:

  • The property basis
  • The overall recovery period
  • The process or method of charging depreciation

Furthermore, the following things should also be kept in mind when calculating depreciation:

  • Knowing The Basis Of The Property - In this case, the basis of the property is meant by the overall cost of the property or the amount you paid to buy the property. All the settlement costs will also be included in the overall cost as well. But, costs like fire insurance premiums, mortgage insurance premiums, credit report costs, and the likes will not be included in the overall cost.
  • Separating The Cost Of Building And Lands - It has been mentioned clearly in the law that the property owner can only depreciate the cost of the building and not the land itself. In order to determine the value of each one, you can easily access the fair market cost of both the land and also the building as well.
  • Included Adjusted Costs Into The Depreciable Amount - Over time you may have to either decrease or increase the total value of depreciation. This is because, over time, you have to adjust the costs that you'll spend on the improvements or additions that you make to the property. Such additions should have a useful life of at least one year, otherwise, you cannot charge depreciation on the same.

    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. 

Author's Bio: 

Caitlyn Bell is an Arts student whose experiences in life make her really tougher than anyone else. She can lend you expert tips on diverse topics ranging from relationship to fashion, making money, health and so on. Her write-ups are a window into her thoughts and knowledge.