To depreciate or not to depreciate, that is the question? Right? Taking depreciation on a property is as debate I have seen many real estate investors have over the years. My two cents is pretty straightforward for this debate.
Taking depreciation on a property
Taking depreciation on a property, where permitted, allows an investor to shelter taxable income from immediate taxes. Called capital cost allowance (CCA) in tax terminology, 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?”
Exceptions to taking depreciation on a property
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.
Resources
For additional resources related to real estate taxes, see:
- Buying real estate in a corporation: A guide for Canadian investors
- Deducting repair costs: How the court sees it
- Repairs and maintenance vs. capital expenditures
More questions?
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
