Depreciation in real estate is a tax strategy that, when used effectively, can help you be even more successful with your investment. Here are some key things to know about building wealth with depreciation.
Depreciation as Defined by the IRS
Depreciation is an accounting term in which the IRS allows property investment owners to reduce their taxable income by deducting a portion of their property’s cost as an expense on their tax returns.
The IRS acknowledges that buildings and improvements eventually wear out and lose value, so they allow property owners to deduct a portion of their property’s cost as an expense on their tax returns. You can depreciate the property’s building value as well as any capital improvements you make to the property.
Here’s a simplified explanation of how depreciation works:
Let’s say you purchase a rental property for $300,000. The IRS determines that the building’s useful lifespan is 27.5 years. This means you can claim an annual depreciation deduction of approximately $10,909 ($300,000 divided by 27.5) against your rental income. You can do this for the first 27.5 years of owning the property
If eventually you do sell your property for a profit, however, be prepared to pay taxes for “depreciation recapture” on the profits you previously avoided paying taxes on through depreciation.
For more about how depreciation helps investors build wealth, be sure to read this post. In addition to reducing a property owner’s tax liability, depreciation can also increase your property’s cash flow and help you defer capital gains taxes when you sell a property. Before pursuing any tax strategy, it’s advisable to consult an accountant who can ensure you’re staying up-to-date with current tax laws.
To learn more about investing in Columbus, get in touch with our team at RL Property Management. We manage more than 600 units throughout Franklin County, and we’d love to help you achieve success with your investment. Contact us to learn more.
