How Does Real Estate Depreciation Work?

Most people think that depreciation is a negative effect of owning a property but actually there is a good side of it that real estate investors should know. Find out what it is here. In today’s video, we are covering depreciation and how it works in real estate.

What is Depreciation?

Generally, depreciation sounds like a bad thing. It is the reduction in an asset’s value over time due to wear and tear. But in real estate, there is a good kind of depreciation that helps you save on taxes and, ultimately, money.

When you own an investment property, you have a typical flat line depreciation of 27 and a half years. That means the valuation of your building–typically the land–is depreciated.  Let’s say it’s a million-dollar property: if you divide 100% by  27 and a half years, that gives you 3.633% a year. So with that million-dollar property, the building itself, you are depreciating about $36,300. That is an amount that can potentially be taken off from any type of income the property accrues. If you are an active investor, you are able to take this off of your actual income as well, which is a fantastic thing.

How Depreciation Works in Real Estate

Depreciation helps you save more money and not pay as much taxes. Because if your property garners $100,000 per year, you normally pay $100,000 and then have your taxes depending upon which bracket you are in. Because of depreciation, it allows you to lower it by $36,000. You only have that net of say about $64,000, but that is great because instead of your income being at $100,000, you are only being taxed on the net amount.

Your goal is to obviously pay less taxes and make more money. Depreciation is a fantastic aspect of owning real estate, and why so many people become rich as a result of owning it.

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If you or anyone else you know is looking for more information and a property manager that can guide you through the investment property process, as well as help you out with things such as taxes and depreciation in real estate, please think of Green Ocean Property Management: where you get more than a property manager, you get peace of mind.