Depreciation of a rental property is the process of allocating the cost of the property (excluding land) over its useful life for tax purposes. It allows landlords to deduct a portion of the property’s cost each year as an expense against rental income, reflecting the wear and tear or deterioration of the property over time.
Here’s how depreciation of a rental property typically works:
Determining the Cost Basis: The cost basis of the property includes the purchase price, closing costs, and any expenses incurred to acquire the property. Land value is excluded because land doesn’t depreciate.
Useful Life: The Canada Revenue Agency (CRA) provides guidelines for the useful life of different types of rental property assets. For residential rental buildings, the useful life is generally set at 27.5 years. For commercial buildings, the useful life can vary.
Calculation: To calculate depreciation, you divide the cost basis of the property by its useful life. This gives you the annual depreciation expense. For example, if the cost basis of a residential rental property is $275,000, the annual depreciation expense would be approximately $10,000 ($275,000 / 27.5).
Claiming Depreciation: Landlords can claim depreciation as an expense on their tax return using the Capital Cost Allowance (CCA) system. CCA allows you to deduct a portion of the property’s cost each year, reducing your taxable rental income.
Recapture: When you sell the rental property, any depreciation claimed during the ownership period may be subject to recapture. Recapture means that a portion of the depreciation claimed will be added back to your taxable income in the year of sale, potentially resulting in a higher tax liability.
It’s essential to keep accurate records of the property’s cost basis, including any improvements made over time, to ensure depreciation is calculated correctly. Additionally, it’s advisable to consult with a tax professional or accountant familiar with Canadian tax laws to ensure compliance and optimize tax strategies related to rental property depreciation.
Tags: Depreciation
