Tax advantages of real estate properties – depreciation

Many people talk about tax advantages of real estate investing.  One important one is depreciation.  Basically the IRS allows you to take a deduction for a building wearing out over time and this is called depreciation.  The reason it is important from a tax standpoint is there is no money actually coming out of your pocket, yet it can offset earnings you may have or make a cash-flowing property look like it is a loss and even reduce your taxable income.  Here is a quick example of how it can work.  Let’s say you purchase an investment property for 100,000 and we will say that the land cost is 20,000.  This means 80,000 is to be depreciated – I believe the current rule is 27.5 years which would mean your depreciation expense is about $3,000 a year.  So if your net income on this property is $250 a month and you earn $3,000 in cash that year – you in fact have earned nothing according to the IRS and will pay no taxes on that $3,000 in earnings.  This is why wealthy people especially like real estate investing – their tax rates are higher and so adding to their income in a tax-neutral way is very appealing.  This is not intended to be a complete guide on the subject – just a quick note as to why real estate investing can be more beneficial than some other types of investing.  I hope it helps!

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