Investment Property Depreciation: How to Maximise Your Tax Deductions

11 January 2023
 Categories: Finance & Money, Blog

If you are a property investor, you must know the benefits of tax deductions on depreciation. In general, buildings will age and experience wear and damage over time. This deterioration is a decline in worth, even when the potential sales price increases. You can claim a tax deduction on the lost value for commercial and residential real estate. However, you must ensure the depreciation is conducted correctly to avoid audit complications and maximise the value of the final deduction. Here are a few critical guidelines to remember for your property tax process.

Avoid Ineligible Property

Old and new properties are eligible for deductions. However, you must remember that the taxation rules change with new legislation. For instance, the specific percentage and the period over which an investor can claim deductions depends on the date of construction. If you purchase an old building, it might be ineligible for the depreciation deduction because of a lapsed period. Also, remember that different regulations apply for the diverse property types in the residential, commercial and industrial sectors. Therefore, it is advisable to review the changing tax laws and consult your tax advisor before filing your returns.  

Consider the Renovations

You should understand the renovations conducted on your buildings before completing the tax depreciation report. The deductions can be applicable for almost all changes made to the structure before or during your ownership. However, you should check the limits on the qualifying period for a renovation deduction. In general, one can assess the depreciation value and claim losses for additions and extensions to the building. 

External improvements like the construction of a driveway or a fence are also deductible. Also, check if some changes have been made to utilities, like the electrical wiring or plumbing pipes. In addition, you should assess the value of the equipment and furnishings in your building. These elements are included in the property tax depreciation report, and the valued items can encompass the HVAC system, water heaters, general furniture and commercial and industrial equipment.

Plan for the Inspection

The inspection of capital assets, such as buildings and equipment for property depreciation, is conducted by a quantity surveyor. An experienced professional is indispensable if you are planning on claiming this deduction for the first time. The specialist will investigate the original cost of construction or purchase and calculate the lost value due to wear. However, inspections are not always necessary if you have past information about the property. If a survey is deemed unnecessary, you can use a depreciation tool to calculate deductions. 

For more information about tax depreciation, reach out to a local service.