If you have acquired a property and you were able to secure some tenants, there is one important thing you ought to know in the process of managing your investment; this is the concept of depreciation. Experienced investors know the importance of depreciation that they already consider this factor even before acquiring a potential income-generating property.
Before dealing with property depreciation, it is necessary to learn what this is all about and how does an investor benefit from it.
What is property depreciation?
Property depreciation is the reduction in value of a particular property in accordance to its normal wear and tear. A property such as a business establishment, apartment building or house that has been standing for a number of years possess a value which is lower than its original cost. Depreciation can be applied to any kind of asset such as vehicles, gadgets and anything that carries a value. Depreciation is calculated considering the number of years and current condition of the asset. While, a property depreciates in value, the application of depreciation provides an advantage to the owner.
Types of Depreciation
Depreciation on Real Estate is divided into two types, Plant and Equipment and Building Allowance. Plant and equipment refers to tangible items used inside the building such as carpets, blinds, dishwashers, microwave oven and other electronic products. Building Allowance refers to the materials used in the construction such as bricks or concrete. These factors are important in the calculation of property depreciation.
Benefits of Property Depreciation
The main advantage of property depreciation is that the amount of tax is lowered down. This is obtained through a depreciation schedule. Depreciation is also known as a ‘non-cash deduction’ because the owner is not obliged to spend money just to benefit from the tax reduction.
As your property ages over time, the amount of tax reduction also increases. Perhaps, depreciation is one reason that holds an owner from selling his property. Take note that higher tax payment is required when you sell a property rather than keeping it. Whether a property is too old or built recently, depreciation is applicable. The difference only lies on how the property should be computed whether it falls under plant and equipment or building allowance or both. This is accurately computed by a professional service provider.
If you currently own a property, make sure that you are paying the right tax in accordance to its present condition. In order not to be burdened with high tax payments, know the value your property and apply the principle of depreciation Sydney. Hire a professional surveyor to accomplish this task so that you get the most accurate value.