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Rental depreciation is the change in value of rental properties within a specified period of time. A number of factors can impact the rate of depreciation, with the gradual deterioration of any buildings on the property being one of the most important. Other factors such as changes in the area where the property is located, shifts in consumer demand for the property, and the state of the general economy can also impact the rate of rental depreciation.
It is important to note that the incidence of rental depreciation does not necessarily mean that the owner is failing to maintain the property. Often, the changes in market value are due to factors beyond the control of the owner. For example, if the neighborhood where the property is located should decline significantly, the value of that property will decrease even if the owner has maintained it in pristine condition.
Understanding rental depreciation is important for purposes of paying taxes and claiming any tax breaks that may be offered as the result of the decrease in property values. Many nations provide some amount of annual depreciation on rental properties based on the age of the structures on the real estate. This means that an office building may be allowed a certain amount of depreciation each tax year, even when the building remains in proper working order and is fully occupied. While this depreciation may be offset by increases in the market value of the property, owners can still utilize this age depreciation as a means of offsetting some of those gains and keeping the taxes owed as low as possible.
In many nations, rental depreciation is only applicable when the owner does not actually live on the premises. This means that an individual who operates a boarding house or other facility that included living quarters for the owner may or may not be able to claim this type of depreciation. One important clue as to whether or not the owner can claim depreciation on the rental property is found in the applicable tax laws. Should the text of those laws note that the tax breaks are only available when the owner does not reside on the property, it is necessary to look for other types of exemptions that may be applicable.
Another important point to consider is that tax laws in some nations draw a distinction between the value of buildings on property and the overall value of the property including the buildings. When this is the case, it is necessary to segregate the value of the structures from the value of the land on which the structures are found. In this scenario, the owner can only claim rental depreciation on the value of the buildings, and must exclude any depreciation that may affect the value of the land. Tax experts can help owners determine the most appropriate way to calculate rental depreciation according to current tax regulations and avoid making claims that are ultimately refused by local and national tax agencies.