Posted by: Daryl & Wendy Ashby | February 21, 2010

Depreciating a Property

As an investor have you considered depreciating a property?

Are you aware of the advantages and disadvantages?

Taking depreciation on a property (or capital cost allowance in tax terminology), where permitted, allows an investor to shelter taxable income from immediate taxes.

Ultimately, these taxes will likely be repaid when the property is sold (termed a “recapture”). Generally though, at the time a property is sold, an investor is likely to have cash available in order to pay taxes, as compared to years when an investor’s income (or ready cash) is lower.

So, in effect, you may chose to ask yourself, “Would I like an interest-free loan from the government for a number of years or not?”

Caveats exist.

One common exception is where the property may be used as your principal residence, which could be ultimately disposed tax-free. An important point for investors to note is that by claiming capital cost allowance, you typically remove the possibility of receiving any proceeds tax-free.

Alternatively, it may be that in a particular year(s) you will have lower amounts of income than in other years. These are the years you’re better off not claiming depreciation and instead just paying the smaller amount of tax you’re liable for.

It’s in the years that you earn a high income that depreciation comes into its own, helping you reduce your tax burden.


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