When it comes to real estate investment, you should also factor in the depreciation element. If you are one of those investors, property depreciation is a subject that you need to know and learn.
But if you want to enjoy the benefit in your investment, make sure you understand the entire concept before you decide to join the investment bandwagon and spend money for the property.
Depreciation Concept
Depreciation is always associated with the decline in an asset’s value over time, mostly because of the tear and wear. For instance, when you buy a car, you realize that its value will decrease over time. Not many, however, know that depreciation can affect the real estate (and the investment).
You see, the IRS makes it possible for real estate investors to actually deduct the depreciation expenses, for tax sake. They understand that investors must spend money to maintain and care for their properties, so the property can fight off deprecation.
That’s why they are giving tax write-off (for depreciation) so these investors can still cope with the operational and maintenance costs.
Basically, real estate investors are given ‘permission’ to deduct the depreciation expenses for the (rental) property if they meet these criteria:
- They are the property’s owners
- The property lasts for at least a year. More would be better
- The property is used as a business or it’s involved in the activity that produces income
- The property has determinable useful life. It is something that is used up, has something that wears out or decays, or it can lose the value because of natural causes.
Further Info about Depreciation
The land alone has never been considered to depreciate. Land simply exists. It doesn’t lose value or wears out. IRS won’t allow you deduct any (depreciation) expenses for the land. In the meanwhile, rental properties depreciation expenses may include floor replacement, appliances replacement, wiring upgrade, new paint coat, and others.
How to Determine Real Estate Depreciation
IRS determines that a (residential) rental property has a useful life up to 27.5 years, meaning that any (investment) property would be depreciated fully after 27.5 years. Within the first 27.5 years, you should be able to deduct the certain percentage for the property value on each year of your ownership.
The Overall Benefits
Naturally, there are significant perks of claiming the tax depreciation. You can enjoy lower taxable income, so you basically won’t have to ‘pay too much tax’. Never underestimate the tax benefit because it can be thousands (or even hundreds of thousands) of dollar for real estate investment.
In case you don’t know it, the tax deduction in real estate depreciation is basically one of the major things that make people are interested in doing real estate investment.
Basically, real estate investors can enjoy a lot of things, including tax benefits. Aside from depreciation, they can also benefit from 1031 Exchange, which can add up their passive income. if you are thinking about investing your money in real estate, these kinds of factors should be included in your investment motivation.
How to Enjoy the Greatest Benefits?
If you want to be sure about enjoying tax benefits from depreciation, it’s imperative that you talk to the expert. Consult a tax expert before you make any deduction depreciation expenses (for the investment properties).
Deduction for depreciation can be quite a lot. You also want to be sure that you deduct them correctly, through the proper stages (or system) only. Over deduction is just as bad as under deduction, and both of them can affect your tax calculation quite negatively. Only consult a reliable (and possibly certified) tax professional so you know that you do it right.
Moreover, if it’s possible, if you are one of those of those real estate investors, you should hire a professional tax expert to manage and handle your taxes. Doing the tax calculation can be a burden. But when you are get the right assistance from the pro, at least you can minimize the possibility of mistakes and errors.
Having such a professional on your side can also be helpful. If you have tax questions or concerns, they should be able to help you deal all of those issues. You want to optimize your tax returns and benefits to the highest level without violating the law.
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Well, they can do it, especially with your tax depreciation.
