Rental tax gains count for little

But what are these advantages – beyond depreciation, which is vastly overrated? Let's look at four categories:

# Depreciation of the building

Landlords can depreciate the value of the building, deducting a portion of the purchase price each year on their tax returns.

In most cases, however, the building's value grows rather than depreciates. So when the property is sold, all the depreciation is "clawed back".

If the seller is in the same tax bracket throughout, she (we'll make her a woman) ends up paying back all the tax breaks received over the years.

True, she's had the use of the money in the meantime. And if she is in a lower tax bracket when she sells – perhaps retired – the clawback won't be as big as her total tax breaks over the years.

But if she's in a higher tax bracket – perhaps because of career advancement or just inflation – the clawback will total more than her tax breaks.

Whatever the situation, the advantages of building depreciation are not nearly as big as is sometimes claimed.

# Depreciation of chattels

When a landlord (a bloke this time) buys a chattel – either as part of the property purchase or later – he writes off the expense over several years.

Read More - Opens in a new window