Depreciation is the meaning of the “D”

Depreciation is the meaning of the “D” in IDEAL. You can save money on taxes by using the depreciation of investment real estate.

What exactly is depreciation? It is a non-cost accounting strategy for taking into account the total financial burden of investing in real estate.

Another way to look at it is that when you buy a brand-new car, its value decreases as soon as you drive it off the lot. The IRS lets you deduct this amount each year from your taxes on your investment real estate property. Kindly note: This is not intended to be tax advice or a lesson in tax policy because I am not a tax professional.

Having said that, the length of time (recovery period depends on the type of property—residential or commercial) and the overall value of the structure of the property determine the depreciation of a real estate investment property.

If you’ve ever received a property tax bill, the assessed value of your property is typically broken down into two categories: one for the land’s value and the other for the building’s value. Your total “basis” for property taxation is the sum of these two values.

When it comes to depreciation, you can only deduct the structure’s original base value from your taxes; Due to the fact that land is typically only appreciated, the IRS prohibits depreciation. The structure on the property, like your brand-new car as it drives off the lot, is getting less and less valuable every year as its effective age increases. Additionally, this can help you save money on taxes.

The best illustration of the benefit of this idea is that you can actually turn a property that generates positive cash flow into one that shows a loss (on paper) when dealing with taxes and the IRS by using depreciation.

Additionally, you can deduct that paper loss from your income for tax purposes. As a result, it is a significant advantage for those who are specifically seeking a “tax-shelter” for their real estate investments.