What Proprietors Need to Know About Current and Capital Expenses Before Depreciating Their Properties

Owners of rental real estate can take advantage of several tax benefits when they are filing their annual returns. However, those property owners need to know how the tax regulations in their jurisdiction regard current expenses and capital expenses. This article gives a general overview of those two expense types. Use this information to make the right decision about which expenses should be included on the investment property depreciation-schedule.

Current Expenses

Current expenses refer to the costs that you may incur in order to maintain the condition of your rental property. For instance, you may need to apply fertilisers on the lawn so that the grass remains healthy and vibrant. Such expenses are usually deducted in their entirety from the gross income that you generate from that rental property during a given year. Those costs are usually deducted fully because many of them are costs that are incurred each year. The taxable income is what remains once you have deducted those current costs.

Capital Costs

Capital costs are costs that you may incur in order to prolong the useful life of your rental property. For instance, you may replace an aging roof so that your rental building is not destroyed by water ingress when it rains. Capital expenses also include the costs that you incur in order to alter the function that a section of your rental property can perform. For instance, you may convert a basement into an office. The costs that you incur, such as installing air conditioning and new office furniture, can be depreciated over several years since they are capital expenses. Any expense that increases the value of the rental property may also be regarded as a capital cost. For instance, installing a new driveway is a capital cost because it improves the curb appeal of the rental property.

The next step that you should know after identifying the capital expenses is how to calculate the rate of depreciation for each of the expenses that qualify for that tax benefit. A depreciation schedule helps you to track the deductions that you need to make for each of the different expenses. For instance, the depreciation of the building itself is usually calculated over a longer duration when compared to the duration during which furniture can be depreciated. A well-prepared schedule helps you to know how to depreciate each expense until it reaches the end of its useful life.

As you can see, some experience and knowledge of all the applicable laws is needed as you prepare the different documents included in your tax returns, such as the investment property depreciation schedule. It is therefore advisable for you to hire an experienced tax accountant so that you don't make any errors that may lead you to miss taking advantage of the tax benefits that you are entitled to.