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Crucial
Depreciation Rental
Property
Facts that You Must Know PART 2
Do you know
that your depreciation rental property plays a vital role when you are
filing your taxes or selling off your rental property? Find out exactly
how in this Part 2
of our Guide to Rental Property Depreciation.
Do you know
the important basics of what is depreciation and how to calculate it
correctly? If No, Click here for Part 1 of this
Depreciation Rental Property Guide first.
How
does Depreciation Affect Your Rental Property Taxes?
Your rental property depreciation is counted as a rental expense. In
other words, you can actually claim the depreciation of your rental
property as a tax deduction.
Since your depreciation is likely to be one of your largest tax
deduction, it will be highly helpful in slashing your rental property
taxes. To see what I mean, let's take a closer look at the formula for
calculating rental property taxes:
Rental
Property Tax = (Rental Income - Rental Expense - Depreciation) x Tax
Rate
It's
important to know that you can only claim depreciation as a tax
deduction for investment properties such as rental properties. You use
depreciation as a tax deduction for your own home.
The government grants this powerful tax advantage to landlords to
encourage more people to invest in rental properties and provide
housing for others.
For more
details on how to calculate and save money on your rental property tax,
Click here
for our complete guide on rental property taxes.
If you did not include depreciation as a rental property tax deduction
in the past, it's still not too late - You are allowed by tax laws to
include up to your latest 3 years worth of depreciation for your next
tax filing.
How
does
Depreciation Affect Your Capital Gains Tax?
When you sell away your rental property for profits,
you will have to
pay capital gains tax in most countries. So how does your depreciation
rental property actually come into the picture?
As we have revealed in our step
by step guide to selling rental property, rental
property depreciation will increase your capital gains tax in two
steps.
Firstly
you will take the total amount of depreciation that you have claimed as
tax deductions so far and add it to your capital gains amount. This
will effectively increase the total amount of capital gains tax that
you will have to fork out.
In
addition to being taxed on your profits from the rental property sale,
you will have pay an extra charge which is equal to 25% of the
depreciation rental property that you have filed as tax deductions so
far.
These tax
rule are enforced so that the government can take back some
of the benefits of depreciation deductions that rental property owners
get to enjoy.
Want to learn MORE practical must-know facts on
rental property accounting?
Return from
this Depreciation Rental Property page to our Accounting for Leases
guide
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