If you are a landlord or plan on investing in rental properties, tax depreciation is a term you should not ignore. Tax depreciation is a tax deduction claimable by rental property owners, allowing them to recover the cost of their investment over time. This means, as a landlord, you can reduce the amount of taxes you pay on your rental income. So, what do you need to know about this form of depreciation?
Reduce Taxes
One of the significant benefits of tax depreciation is that it enables you to reduce the taxes paid on rental income. As a landlord, you can claim the depreciation expenses on your rental property, and the value of your rental property decreases over time. This means fewer taxes because the government considers this an expense on your part, even though you didn't technically pay out any cash for it.
Cost Recovery
Another significant advantage of tax depreciation is being able to recover the cost of your investment in the rental property. Rental properties are long-term investments; therefore, the investment cost cannot be claimed all at once but rather spread over its useful life. The tax authority recognises this and allows landlords to claim a certain amount of their rental property value back each year. This accounts for the wear and tear on the property, which reduces the value of your property over time.
Increased Cash Flow
As a landlord, your goal is to profit from the rental property business. Claiming tax depreciation on your rental properties will reduce the amount of taxes paid on your rental income. This results in increased cash flow, which you can then reinvest back into your properties or use for other investments.
Capital Gains Tax
Tax depreciation is not only beneficial while owning rental properties, but it also benefits landlords when they sell their properties. Capital gains tax works on the profit earned from selling a property. Still, claiming tax depreciation on the property reduces the amount of capital gains tax paid by the landlord.
Property Value
Rental property value decreases over time due to wear and tear, but the land holds value, making it a good investment. As a landlord, claiming tax depreciation ensures that you are still receiving a tax benefit for your rental property investment throughout its useful life.
The Takeaway
In conclusion, tax depreciation is crucial for landlords or anyone investing in rental properties. Contact a professional to learn more about tax depreciation.
