I-A-Q #26: 🧑✈️Learn the Lingo, Agents!
Happy Monday!
Here is an Idea, an Action, and a Question to consider this week.
Idea
Learn the lingo.
Learn the lingo.
Did I say “Learn the lingo?”
You can’t be part of the conversation if you don’t sound like you belong, and nothing makes you sound like you don’t belong more than tripping on your REI terms.
Time for school.
Depreciation vs. Appreciation
As real estate agents, we understand the concept of appreciation. Generally, we like to see broad and continual appreciation of the market and our client’s home values. However, one massive benefit to owning investment real estate is that the IRS allows you to view that purchase as a depreciating asset from the moment you buy it.
Just as a car loses value the moment it leaves the car dealership, the IRS allows us to view our investment properties the same way. Per IRS Publication 527, commercial real estate depreciates over a period of thirty-nine years while a residential property (which includes multifamily properties) depreciates over twenty-seven and a half years. After those time periods, the properties cannot depreciate any more (i.e. their depreciation basis is $0).
Another key point is that land cannot depreciate––dirt is dirt is dirt––but the improvements on the land do. These improvements can be things like a building, roads, sewer systems, etc.
How does depreciation help you as a rental property owner? For example: If you had $10K/year in straight-line depreciation, it’s basically a paper-only expense. If that property produces $12K of taxable income in a year, you can effectively subtract the depreciation expense to reduce your tax burden. In this example, you’d subtract your $10K in depreciation from the $12K in taxable income, to result in paying taxes on only $2K of rental income. Obviously, there are more variables to consider in terms of write-off and taxes, but this is a simple way to see how depreciation can save you money in the near term!
It’s worth noting that this isn’t a free gift from Uncle Sam––when you go to sell your property that’s been depreciated, you’ll have to consider depreciation recapture. More on that in the Action section.
