Special Report – How Depreciation Benefits Real Estate Investors and Business Owners
First of ALL: Do NOT Allow Yourself To Feel Bad about not knowing.
When I began my real estate business, I did not understand “depreciation” until I saw the huge benefits at tax time.
Then I really began to pay attention.
Depreciation: A non-cash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached.
There are several accounting methods that are used in order to write off an asset’s depreciation cost over the period of its useful life.
Because it is a non-cash expense, depreciation lowers the company’s reported earnings while increasing free cash flow.
Simple Example:
Suppose a painter buys an extension ladder for $1,000.00 and let’s assume the life of the ladder is 10 years. Although the painter is out $1,000 cash out of pocket right now in his purchase of the ladder, he can only “write off” $100 per year for 10 years because the ladder has an expected life of 10 years. On top of this, the ladder will probably be worth ZERO at the end of the 10 year period.
CHECK THIS OUT:
With real estate, we sort of get to do the same thing like the ladder.
You can NOT depreciate DIRT. It lasts forever; however, the things built on the dirt, buildings and improvements have an expected life according to Uncle Sam.
RESIDENTIAL Real Estate improvements depreciate on a 27.5 year schedule.
COMMERCIAL is on a 39 year schedule.
What’s beautiful about real estate involves it usually holds it value and sine we are at the bottom of the real estate market now, it will almost go UP IN VALUE again… and not down in value like the poor old painter’s ladder.
Example 1
• Contractor Buys $10,000 Gutter Machine
Life of Gutter Machine = 10 years (example)
Contractor does NOT get to write off 10k the year of his purchase.
Contractor gets to write off 1k for 10years.
the remaining 9k is carried on his books as an asset and gets reduced 1k each year until it reaches zero.
Example 2
Investor with 10 yr Rental bought for $80,000
You generally cannot deduct, in one year, the entire cost of property you purchased, either for use in your trade or business or to produce income, if the property has a useful life substantially beyond the tax year.
Instead, you can depreciate it. That is, you can spread the cost over a number of years, and deduct a part of the cost each year.
The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture.
You cannot claim depreciation on property held for personal purposes.
If you use property, such as a car, for both business or investment and personal purposes, only the business or investment use portion may be depreciated.
You may depreciate property that meets all five of the following tests.
• It must be property you own.
• It must be used in a business or other income–producing activity.
• It must have a determinable useful life.
• It must be expected to last more than one year.
• It must not be excepted property. Excepted property (as described in Publication 946, How to Depreciate Property) includes certainintangible property, certain term interests, and property placed in service and disposed of in the same year.
To Your Continued Success!
Mike Butler
P.S. ALWAYS Check with your Tax Advisory and/or CPA before taking action.
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NOTES From Video
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80,000 dirt value is 5k
75k over Residential,….. 27.5 (25)
10 years….. Luke will give investor 150k this week for this house?
Fred Flintstone 3 Finger Depreciation Formula…
75k divided 25 yr = 3,000 year in depreciation
3k x 10 yrs = $30,000
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>>>> 80k minus 30k deprection = 50k cost basis…
Sell for 150k ….. capital gain of 100k
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INVESTOR NIGHTMARE STORIES
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Yes, you can be creative and accelerate depreciation pretty darn fast.
do this only if you need it NOW and Yesterday…
500k year.. AGI….
if you got 30k in depreciation,.. yes, accelerating it would be good for short term benefit.
100 year AGI….
300k annual depreciation… WHY WOULD YOU ACCELERATE IT?
My Battle Plan is to always add to my cost basis to keep bumping.
I want Depreciation to outlive ME..
a lot of investors, veteran, they bitch and moan and complain of paying too much income tax..
paid for, FRESH OUT OF WHAT?…. depreciation…
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When You Buy a Rental Property…
EVERYTHING YOU DO TO THIS PROPERTY BEFORE YOU PUT A TENANT IN IT
Becomes Part of the Cost of this investments…
50k.. and do 16,000 in Capitalized Expense Account
… at the end of year, tx into asset account.now your investment is 66k….
