Real estate depreciation is a significant tax benefit available to real estate investors. It allows them to deduct a portion of the cost of their investment property each year, reducing their taxable income without an actual cash outflow. Unlike other deductions where money is spent, depreciation is a non-cash deduction, meaning that you get to reduce your taxes without actually spending any money. It’s an accounting method for recognizing the wear and tear on an asset over its useful life. It’s important to note that you cannot depreciate land; depreciation only applies to the building and improvements on the property. The Internal Revenue Service (IRS) allows depreciation for residential rental property over 27.5 years, and for commercial property over 39 years.
The basic tax benefit of depreciation is that it reduces your taxable income, thereby lowering your overall tax liability. For example, if you own a rental property that has a depreciable basis of $275,000, you can deduct $10,000 per year (assuming residential property with a 27.5 year life) as depreciation. This deduction directly reduces your rental income, lowering the amount you pay taxes on. If your rental property generated $40,000 in rental income, and you take a depreciation deduction of $10,000, your taxable rental income is reduced to $30,000. This can save investors thousands of dollars annually. The depreciation expense is taken whether the property generates income or not.
To maximize depreciation benefits, investors can use several strategies. One is to identify and segregate the different types of assets within the prop....
Log in to view the answer
