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Depreciation is one of the biggest reasons why the rich buy real estate
Let me break down exactly what it is and why:
Let me break down exactly what it is and why:
First, let's define 'depreciation' in general terms
It is the decline in the value of an asset over time
Example:
The moment you drive a new car off the lot, it depreciates in value. (Try to sell it the next day & it will be worth less money)
Depreciation implies loss
It is the decline in the value of an asset over time
Example:
The moment you drive a new car off the lot, it depreciates in value. (Try to sell it the next day & it will be worth less money)
Depreciation implies loss
In real estate, depreciation is used as a tax benefit
To explain this further, let's first talk about how to calculate depreciation on an investment property
To explain this further, let's first talk about how to calculate depreciation on an investment property
First, you need to find the value of your building, excluding the land value (land doesn't depreciate)
You can find this on the property appraiser's website of the county your property is located in
You can find this on the property appraiser's website of the county your property is located in
Second, an asset is depreciated over 27.5 years
(This is only for residential property)
So, take the building value and divide it by 27.5
(This is only for residential property)
So, take the building value and divide it by 27.5
For example, let's say you buy a $300,000 property.
$240,000 = building
$60,000 - land
To calculate depreciation:
$240,000 / 27.5 years = $8,727 deduction per year
$240,000 = building
$60,000 - land
To calculate depreciation:
$240,000 / 27.5 years = $8,727 deduction per year
Now that you know how to calculate depreciation - let's talk about why it's so great
Two reasons
Two reasons
1/ That $8,727 above is a yearly tax deduction to offset your taxable income
It lowers the amount of income you have to pay taxes on
You can do this for every property you have, every year, for 27.5 years
It lowers the amount of income you have to pay taxes on
You can do this for every property you have, every year, for 27.5 years
2/ You are depreciating an asset that is appreciating.
On your taxes, your asset looks like it is 'depreciating' or going DOWN in value
But the real estate market is appreciating over time = your property is going UP in value
On your taxes, your asset looks like it is 'depreciating' or going DOWN in value
But the real estate market is appreciating over time = your property is going UP in value
You are literally "having your cake and eating it too"
You have the benefit of a tax break as if your asset is going down in value
at the same time
You have the benefit of more equity since your asset is going up in value
You have the benefit of a tax break as if your asset is going down in value
at the same time
You have the benefit of more equity since your asset is going up in value
The depreciation tax benefit is one of the reasons why real estate is a great asset to invest in
You don't get this major benefit in other asset classes
You don't get this major benefit in other asset classes
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