# A Brief Comparison of Prime Cost with Diminishing Value Depreciation Method

When you have purchased new property, you can take the benefit of tax depreciation using two depreciation methods. You may prepare your depreciation reports using these two methods namely prime cost or diminishing value. However, you must weigh all the factors prior to using these two depreciation methods. The prime cost depreciation method calculates a decline in the value of an asset through its effective life at a fixed rate every year. Meanwhile, the diminishing value depreciation method will permit for an increased depreciation deduction in the initial few years of property ownership.

Here are a few important factors that you should consider about these two methods:

Examples of Prime Cost and Diminishing Value Depreciation Method

The two methods can be understood with an example. The formula for prime cost depreciation method is asset’s cost x (days held ÷ 365) x (100% ÷ asset’s effective life). If the cost of an asset is \$50,000 with an effective life of 10 years, you may claim 10% of its cost for ten years. This is how depreciation will be calculated using prime cost method: \$50,000 x (365 ÷ 365) x 10% = \$5,000

Meanwhile, when it comes to diminishing value method, you will use this formula: Base value x (days held ÷ 365) x (200% ÷ asset’s effective life)

For instance, if the cost of an asset is \$50,000 with an effective life of 10 years, the first year’s deduction will be like this:

\$50,000 x (365 ÷ 365) x (200% ÷ 10) = \$50,000 x 20% = \$10,000

The second year’s deduction will be \$8000, third year’s deduction will be \$6,400, and fourth year’s deduction will be \$5,120. And, the depreciation calculation will go on until the final value of assets becomes zero. You can seek higher tax refunds using the two methods.

Which Method You Should Opt?

The prime cost depreciation method offers uniform depreciation and has emerged quite simplified. Meanwhile, the diminishing value depreciation method offers increased upfront depreciation during the first few years before declining over time. You must consider a few factors given below:

How Long You Plan to Hold Your Property?

If you do not intend to sell your property for the next forty years, the result for depreciation will remain the same. But, sometimes unforeseen situations may take place. And despite no planning to sell, you may have to sell your property.

Are You Using Your Property as Main Place of Residence or Rental One?

If you are residing in your property and plan to rent it, you may miss the chance to claim depreciation during the period you lived in it. You may come across other factors like Government incentives or grants that will give you more advantages. And, depreciation may not be a factor. You may hire a property tax depreciation schedule consultant to discuss the two methods.

Predicted Tax Circumstances During Each Financial Year:

If you happen to an investor with low income, you may want to reduce your deductions in the first few years of ownership. You may want to take benefit of higher depreciation claims a few years down the line when you will be earning higher.

Each depreciation method has its own advantages and disadvantages. You may hire tax depreciation quantity surveyors to prepare your depreciation report.  The two depreciation methods either provide you an aggressive upfront claim or more uniform claims every year. It is vital to comprehend that once you have decided which depreciation method to use, you will not be able to switch. You should speak to leading professionals to ensure all factors are taken into consideration before deciding which method will be appropriate for you.

0 replies