How to calculate the depreciation on your holiday rental

September 2024

If you’re a new holiday rental landlord, you may not be familiar with depreciation. However, as the annual tax deadline draws near, understanding this concept is essential. Dip your toe into the world of holiday rental depreciation with these helpful tips.

What is depreciation?

All assets tend to lose value over time — a fact that everyone who runs their own business knows well. To give a simple example, think about a piece of furniture. You may spend £2,000 to buy a brand-new sofa. After a couple of years, you’ll get tired of it and want to sell it, but at this point, it’s worth significantly less. If you try to advertise it for that original £2,000 price tag, the reaction from potential buyers is likely to be incredulous laughter.

The same is true of a holiday rental. Depreciation refers to its reduction in value over time. This may be due to regular wear and tear or something larger, such as changing market conditions or new legislation. Over the years, your holiday rental’s value may drop significantly, so when it’s time to sell, you may not be able to ask for as much as you paid originally. Just like in the sofa example, the value of the property has depreciated.

How much does a house depreciate?

It’s hard to calculate the depreciation of a property precisely. Unfortunately, there are a number of mitigating factors, such as the conditions of the market or the local laws and regulations governing holiday rentals, which you’ll need to take into account. However, as a general rule of thumb, most experts say that you can expect the value to depreciate by about 15% in the first year after purchase.

As well as trying to calculate house depreciation, you should also think about other factors. Yes, your holiday rental value will decrease over time, but so will the value of the items inside. You can find furniture depreciation calculate websites to help you work out how much value your assets are likely to lose. As always, though, it’s hard to be precise. After all, you never know when guests will spill red wine on the carpet of your holiday rental.

How much does a house depreciate?

It’s hard to calculate the depreciation of a property precisely. Unfortunately, there are a number of mitigating factors, such as the conditions of the market or the local laws and regulations governing holiday rentals, which you’ll need to take into account. However, as a general rule of thumb, most experts say that you can expect the value to depreciate by about 15% in the first year after purchase.

As well as trying to calculate house depreciation, you should also think about other factors. Yes, your holiday rental value will decrease over time, but so will the value of the items inside. You can find furniture depreciation calculate websites to help you work out how much value your assets are likely to lose. As always, though, it’s hard to be precise. After all, you never know when guests will spill red wine on the carpet of your holiday rental.

Tax breaks for holiday rental depreciation

If you’re looking at how to calculate the depreciation of property, you may be starting to panic. Is a holiday rental even profitable when you take depreciation into account?

It’s not all doom and gloom, though. In many countries, the government provides some form of tax break to deal with the costs of depreciation. In the UK, tax breaks come in the shape of capital allowances. These are tax deductions that can save you money on furniture, decor, and equipment for your property —you can also claim them on some refurbishment costs, including plumbing and wiring.

To work out how much you can save through capital allowances, it’s best to speak to a financial advisor. This is a somewhat complex area of legislation, and if you try to work it out yourself, you’re likely to miss out on savings.

How to qualify for depreciation tax breaks

Again, different countries have different criteria. In the UK, in order to qualify for the tax breaks offered by capital allowances, you’ll need to meet certain requirements. These include:

• Your property must be furnished. There are no specific rules stating exactly how much furniture you need, but as a good rule of thumb, you should have all the furnishings necessary for a self-catering holiday home.
• You must intend to make a profit. Your actual profitability is less important than your intention. This means that you should be able to show a business plan. You can also prove your intentions when you advertise your holiday home on a holiday rental portal.
• Your property must be available to let. There are clear rules over what this means. For instance, in the first year, your property must be available to let for 210 days and let out commercially for 105 days. It may be occupied for more than 31 days by the same person, but these longer-term lettings must not take up more than 155 days in total during the year. You and friends or family staying in the property for free or at a discounted rate do not count towards these figures.

If you don’t meet these conditions, then unfortunately, your property will not be considered a furnished holiday rental. That means you won’t be able to take advantage of the tax breaks available.

Remember, these conditions affect holiday rental properties in the UK. Many holiday rental landlords prefer buying properties in other countries, particularly popular European destinations. In this case, you should hire a local financial advisor or lawyer to help you navigate the regulations. Each country is different, and in some areas, there are also regional variations in legislation that could impact you.

Is it still profitable to rent my holiday home?

When you try to calculate holiday rental depreciation, it’s natural to start to panic. After all, you start to rent holiday apartments to turn a profit, but if the value of your asset keeps going down, is it still a good decision?

Well, as you can see from any holiday rental website, thousands of landlords continue to choose this way to invest. Savvy landlords also know there are key steps they can take to minimise depreciation. These include:

• Keeping your property well-maintained. Letting it fall into disrepair will speed up depreciation, so make sure you look after it.
• Using your property regularly. If a building stands empty for a long time, it tends to depreciate faster. Do your best to have a steady stream of guests. This helps ensure you spot potential problems sooner rather than later.
• Choosing a good property in the first place. If you select a holiday rental in a popular tourist destination, then it is more likely to retain its value.
• Selling your property at an opportune time. If you intend to eventually sell your holiday rental, then it’s worth keeping an eye on the housing market.

These steps can help alleviate the problems of property depreciation. Together with the tax breaks offered through capital allowances, you might find that depreciation is no longer a burning issue for you. If handled correctly, your holiday rental business should continue to turn a profit, regardless of depreciation.