Depreciation and storm damaged to investment property.So, what happens to depreciation if disaster strikes your investment property? Unfortunately, there is no real winner. Let’s look at the following example to illustrate what happens. Property investor John Smith installed $2,000 worth of carpet in his house when it was brand new. Over time he has written-off half the amount in depreciation and has $1,000 left to claim. Then the floods came and destroyed the carpet. Scenario 1 - Those without insurance: Without insurance, John Smith can claim the remaining $1000 value of the carpet as an immediate deduction. If he purchases replacement carpet then that will be depreciated over a 10 year effective life. Scenario 2 – Those with insurance:  If John Wayne did have insurance, he can still write-off any residual balance of the carpet left to depreciate i.e. the $1,000. If the insurance company then replaces the carpet, he cannot depreciate the new carpet because he didn’t pay for it. But at least he’s ended up with new carpet.

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