Depreciation Saves on Taxes

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Real estate depreciation is a tax deduction that allows property owners to recover the cost of wear and tear on their investment properties over time. Here's how it works and how it can benefit investors:

How Depreciation Works

1. Eligible Properties: Only income-generating properties, like rental homes or commercial buildings, qualify for depreciation. Personal residences do not.

2. Depreciation Schedule: The IRS allows investors to depreciate residential properties over 27.5 years and commercial properties over 39 years. This means you can deduct a portion of the property's cost each year.

3. Calculating Depreciation: To calculate, subtract the land value from the total property cost, as land cannot be depreciated. Divide the remaining amount by the depreciation period to find your annual deduction.

Benefits for Investors

• Tax Savings: Depreciation reduces taxable income, which can lower your overall tax bill. This is especially beneficial for investors in higher tax brackets.

• Cash Flow Improvement: By reducing taxable income, investors can keep more of their rental income, improving cash flow.

• Offsetting Other Income: Depreciation can offset other income, potentially reducing taxes on earnings from other sources.

Understanding and leveraging depreciation can significantly enhance the financial performance of real estate investments. It is one of the four pillar benefits of real estate investing. Always consult with a tax professional to maximize these benefits.