What is depreciation?
Depreciation makes real estate a favorable investment choice because it’s also treated as an expense for tax purposes. While only an expense on paper, it can nonetheless offset or shelter other income from taxation. The IRS realizes that assets such as an apartment building or shopping mall will not last forever. They therefore allow an owner to deduct an amount as depreciation that allows the owner to recoup his or her investment. Each year the investor deducts the amount of depreciation from the property’s cost basis, which is the owner’s cost plus improvements made, less any depreciation that the owner has already taken.
Why is depreciation important and how do I maximize it?
- It is proven to be a significant tax shelter
- You can write off your interest on your loan
- Keep more of your income
- If you have owned your apartment longer than 27.5 years, you are out of depreciation. Trade your property using a 1031 Tax Deferred Exchange and start saving more of your income.