Q: When should a real estate investor consider depreciating a property and what are the advantages and disadvantages?
A: Taking depreciation on a property (or capital cost allowance in tax terminology), where permitted, allows an investor to shelter taxable income from immediate taxes. Ultimately, these taxes will likely be repaid where the property is disposed of as part of “recapture”. Generally though, if the property is sold there will be proceeds available to pay taxes as compared to through the years when extra proceeds may be harder to come by. So, in effect, often the question should be rephrased to ask, “Would you like an interest free loan from the government for a number of years or not?”
Clearly exceptions exist. The typical exceptions are where the property may be used as your principal residence which could be ultimately disposed tax free. Claiming capital cost allowance typically removes the possibility of receiving the proceeds tax free. Alternatively for example, it may be that in a particular year(s) you will have lower amounts of income than in other years such that it could be a good idea to claim capital allowance in higher years and pay a little tax when your income is low, thus not claiming the depreciation.
