Another unique and huge real estate advantage is the ability to DEPRECIATE your investment even while the value of the asset is increasing!
Depreciation represents a cost of ownership and the consumption of an asset's useful life. It is an expense recorded to allocate a tangible asset's cost over its useful life. Since it is a non-cash expense, it increases free cash flow while decreasing reported earning, putting more money in your pocket while reducing your taxable income.You can be depreciated a real estate investment, a durable good, and is viewed by the IRS as an expense that can be used to offset your earnings.(IRS Tax Code 26 U.S.C. § 469)This paper expense increases your return on investment.
Now your thinking: Since when does the IRS give you something for nothing?Well, depreciation is taxable by the IRS on the sale of the real estate unless deferred by a 1031 exchange: see Part 5: Taxes.The IRS does puts limits on the amount you can deduct for depreciation, currently $25,000, unless your are a “real estate professional.”Before declaring yourself a real estate professional or try deducting depreciation it is again strongly recommended that you consult with your tax accountant.
You cannot depreciate saving accounts, 401k accounts or stocks.Period!Those investment options cannot take advantage of this enormous real estate investment advantage.
