Apr 12, 2019
047 Should I Depreciate My Building?
This topic is kind of near and dear to us since we are considering depreciating our buildings this year even though we have not depreciated them before. As we were learning about this topic, I thought this would be good time to share this with you.
So, "Depreciation is the term used to explain the loss of value of certain products or goods. It is mostly an accounting term and it is reflected in company, business or personal financial income statements as an expense. The concept of depreciation is explained by the use that is given to the product over the years, that is, measuring the loss in value of an asset or property over specific periods of time until it has completely lost its value."
However, with Real Estate it doesn't completely lose it's value but vehicles, computers and other electronic items they all depreciate and eventually lose its value.
Now, I want to share some important factors to consider before deciding to depreciate your building. CRA does allow you to depreciate your building but not to create a loss. The other thing you have to keep in mind is that they will Recapture that depreciation too upon sale so you don't want to depreciate your building too much.
The main purpose of depreciation is its use in itemizing income tax deductions.The Capital Cost Allowance (CCA) is the tax term for depreciation, and it is the only allowable depreciation expense. It is the term used for the part of the cost of the property that can be deducted from the income taxes according to Canadian laws. The amount you can deduct gradually increases over time, decreasing the value of the assets of the company or individual. The CCA that can be claimed depends of the properties owned and the time of purchase.
CCA Calculation Method:
Your CCA is based on the type of rental property and when you obtained it. To determine the amount, you would likely use the “declining balance method.” In this case, your CCA amount is based on any allowance claimed in prior years subtracted from the capital cost of the property. As you claim the CCA, in subsequent years your remaining balance declines. You can claim any amount of your allowance for the year—you do not have to the take the full amount all at once. For example, you might want to hold off on claiming your CCA if you don’t owe any taxes for the year, since taking the allowance lowers the amount you’re entitled to in upcoming years.
Upon selling a property, Recapture may happen if the proceeds from the sale exceed the remaining undepreciated capital cost.
Claiming CCA on Full Net Additons:
A half-year, or 50 percent, rule applies in the year that you obtained the rental property. Therefore, in the year you bought the property, you cannot claim the CCA on all your net income additions in a given class. Instead, you would claim the allowance on only half of your net additions. For example, if you purchased a rental home for $20,000, your allowance would be based on $10,000 for the first year.
Taxes and Rental Losses:
If your rental expenses exceed your gross rental income, you have incurred a loss. You may be able to deduct your rental loss from other sources of income, but you cannot use CCA to increase or produce a rental loss. For example, you own two rental properties. The net income for one property is $3,000, while the other property yielded a loss of $5,000. This means you suffered a loss of $2,000. Because you cannot increase your net rental loss by claiming CCA, you cannot claim any CCA on your rental buildings. There are pros and cons to taking CCA. On the upside, the allowance lowers your taxable income, which ultimately reduces your tax liability. On the downside, when you sell the property all prior CCA claims are recaptured and treated as taxable income, which increases your tax liability.
Therefore, “The decision as to whether to take CCA should be discussed with an Accountant."
To learn more on this topic, watch my Facebook live video here.