When you receive a depreciation schedule for your investment property, you have a choice to make.
You can choose between the diminishing value method (DVM) of depreciation or the prime cost method.
Once you’ve made your choice, you can’t alternate between the two.
The DVM method depreciates items more quickly up front. This method recognises the fact that most plant and equipment items lose a higher portion of their value early on.
The decline in the value of the item gets progressively smaller over time on the way towards $0.
For example: If the carpet you bought has a value of $1,000 and a 10-year effective life, you would calculate the depreciation as follows:
- Year 1: $1,000 × 20% = $200
- Year 2: ($1,000–$200) = $800 × 20% = $160
- Year 3: ($1,000–$200–$160) = $640 × 20% = $128
And so on and so on.
Property investors tend to use the DVM when they want their deductions up front, but it’s always best to check with your financial advisor as to which method suits your individual circumstances.
Next month we’ll look at the benefits of the prime cost method.