Depreciation is one of the most overlooked tax benefits that investors can use on their tax returns. It’s based on the principle that everything gets old and becomes useless. A car depreciates, and an appliance depreciates. Every tangible thing that we have comes with a depreciation schedule that the U.S. government attaches to it.
The depreciation age for a property is 27.5 years. There’s no real explanation for this number, but that’s what it is. On paper, tax collectors believe your real property will crumble to the ground in 27 and a half years. So, you can depreciate that asset each year that you own the property. It’s going to be less in value by tax terms.
Depreciation Tax and Value
We all know that property actually increases in value. There may be some fluctuations in the real estate market, but over every decade, property values will increase. However, the tax authorities give you the opportunity to devalue your properties. This means if you have a property that’s valued at $270,000, and you divide that by 27.5, you get $10,000, or something in that range. So, if you collect $20,000 in rental income, you can offset that income on your taxes by $10,000. The government recognizes that when you use your property as a rental investment, it devalues by $10,000 over the course of a year.
Additional Tax Benefits
When you include the other tax benefits that you know about, such as the interest you can claim on your mortgage, and expenses such as property management fees or inspection visits to the property when you’re an owner living out of town, your rental property brings you a lot of tax help. When you measure all of those benefits against the income that your property earns, your real property investment performs extremely well.
The stock market can increase, but there is always a risk of it dropping. We all remember 2008 and 2009. Real property is tangible. It’s there and it increases in value year after year. Real property has outperformed the stock market since the markets began.
Consider the benefits of depreciation. They are real but often unused and not always recognized by landlords and investors.