I have a new IP that a quantity surveyor has drawn up a depreciation schedule for. Can this annual depreciation amount be used against other income?
Also if the IP is in the name of a low income earner (eg my non-working spouse) can they 'save up' the depreciation (like capital losses) to use in a year that they earn more (and hence have more tax to pay)?
Hi House Call…
House Call wrote:I have a new IP that a quantity surveyor has drawn up a depreciation schedule for. Can this annual depreciation amount be used against other income?Depreciation on a rental property is treated the same as any other expense of a rental property… so including the depreciation will reduce profit/increase the loss… which can be offset against your other taxable income.
House Call wrote:Also if the IP is in the name of a low income earner (eg my non-working spouse) can they 'save up' the depreciation (like capital losses) to use in a year that they earn more (and hence have more tax to pay)?In a way yes.. but its different to capital losses, and not as effective. You cant really choose -when- to claim depreciation, you either claim it per the schedule or you dont claim it. So… even in years where it isn’t going to be effective to claim it, it must still be applied to taxable income. That said.. if the taxable income is less than zero.. that minus figure will roll over to the following year (similar to capital losses).
The following is difficult to explain without getting a little technical…
So.. with other income (OI) of $20k, and a rental loss (RL) of $10k and depreciation (D) of $8k.. then claiming the depreciation provides no advantage.. because the tax on OI – RL is $0 anyway.
if however OI=$10k, then OI – (RL + D) = -$8k so that minus figure will roll over into the following tax return, so there is some (future) benefit to claiming the depreciation.Considering the ramifications for CGT you have a tough decision to make… Whatever depreciation you claim over the years, will reduce the ‘cost base’ when your capital gain is calculated. Your effectively claiming small portions of your purchase price over the years, and thus wont be able to claim those portions against the sale price later. Usually the 50% discount will counter-act this, so that in the long run there will be a benefit to depreciating. In this case its hard to say.. because in some years you may not get any tax benefit from claiming the depreciation. Depends how likely you are to sell.. and what the other income will be in the intervening years.
Mr5o1 wrote:Considering the ramifications for CGT you have a tough decision to make… Whatever depreciation you claim over the years, will reduce the 'cost base' when your capital gain is calculated. Your effectively claiming small portions of your purchase price over the years, and thus wont be able to claim those portions against the sale price later. Usually the 50% discount will counter-act this, so that in the long run there will be a benefit to depreciating. In this case its hard to say.. because in some years you may not get any tax benefit from claiming the depreciation. Depends how likely you are to sell.. and what the other income will be in the intervening years.Thanks Mr5o1. Comprehensive reply.
Clarifies it a lot, actually.
Turns out my non-working spouses 2 IPs are so extremely positively geared that the depreciation will be worth it, and even more if she goes back to work which is likely. The CGT is an issue I suppose except that the here-and-now of claiming depreciation seems too appealing at the moment. I cannot see us selling either place in at least the next 5 years.
You are very welcome..
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