What in the world is Depreciation?
Two things that are guaranteed in life are death and taxes! Sound familiar?
Taxes are our biggest expense.
One important way to build your wealth is to create strategies to minimize taxes.
It’s important to know that you can indeed decrease your taxes with certain investments.
In general, whenever you make money, you are typically taxed on that money.
For example, if you own a dividend stock, you will be taxed on the dividend you received as a distribution. Even if your money is sitting in a savings account, and you make an interest rate of 0.01%, you will be taxed on that income.
How does real estate investing provide tax benefits?
Now I am not a CPA or attorney, but you’ve heard me talk about the benefits of real estate investing and how one of the most powerful of those benefits are the tax advantages.
Do you know how those tax advantages work?
One word. DEPRECIATION
So what exactly is that? Well, The Oxford Dictionary defines depreciation as “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.”
Depreciation is an accounting method, allowed by the IRS, of allocating the cost of a tangible asset over its useful life to account for declines in value over time.
Ok, but what does that mean in layman terms?
On a very basic level, you are telling the IRS that your asset is losing value, even if it is cash flowing AND appreciating in value. You’re doing this legally! These are essentially phantom losses.
When you invest in an apartment syndication, you are a fractional owner of a multimillion dollar property. Every tax year, you will receive a K-1 Tax form that will claim either gains or losses.
Below is an actual K-1 from one of my investments. You can see that I invested $50,000 and received a loss of -$49,001 for that year.
This passive loss can offset any future distribution I get from this real estate investment or any other passive investments, meaning I don’t pay taxes on my gains unless they are more than $49,001.
If I don’t use it in one calendar year, then I can carry it forward until I can use it!