Why Depreciation On Real Estate Is A Gift You Cannot Afford Not To Use
I always say that the United States of America has on offer some of the best gifts for investors, which people in other nations cannot even believe! For instance, there is the 30-year fixed-rate loan that is an unbelievable gift, and then there is depreciation which is another incredible gift for investors. In my recent podcast I speak about how depreciation helps investors make the best of their property investments, about depreciation recapture, step up basis, and more.
How depreciation helps.
Now I don’t know where else this is true, but in the USA it is – that you get depreciation on your real estate investment. Typically depreciation is available on cars or machinery or gadgets and so on – things that will lose value over time as they are used. Real estate is different in that it is not going to wear out or stop working at some point like a car or piece of machinery. And yet, our great country gives you depreciation on your property – this even as your property may actually be going up in value.
Depreciation is flexible in the way that you can use it. It is a tax deductible expense and as such it will be very useful for lowering the amount of tax you pay in a given year. Also, you can choose to use your depreciation in the current year or later depending upon your income in a given year. Of course there is a threshold beyond which this cannot be used and currently that limit is $150,000/- (this of course is subject to change) adjusted gross. The ability to carry forward net operating losses is quite unique in my view.
Other concepts to understand.
Now I have to clarify that I am not a trained accountant and you must cross check all of what I say with your CPA. However, my many years as an investor and investment guide have given me some practical insight that I'm sharing here with you. So, depreciation comes in handy in yet another way. There is something called depreciation recapture, which can help you take advantage of inflation. It is very useful when selling a property – whether you do it soon after buying or many years later. You can ‘recapture’ depreciation in the future – when your dollar is literally worth less.
And then there is the concept of step up basis: I like to explain this as, stepping up on a stair and on the day of your death. Not to be morbid, but this is going to help your heirs save on taxes after your demise, as I explain in my podcast. This is a pretty vast subject and quite complex. So I urge you to clarify all these concepts with a CPA. You may also want to attend our quarterly events where we invite CPAs to explain matters such as these as well.
