Broker Margaret Vierra Discusses How Depreciating Property Saves Money

Depreciation allows real estate investors to reduce the value of an asset over time, due to its age, wear and tear, or decay. Buildings are depreciated over a 39-year schedule as outlined by the Internal Revenue Service.
“It’s an annual income tax deduction that’s listed as an expense on an income statement; you take a depreciation deduction by filing Form 4562 with your tax return,” said EXIT Realty Keystone Broker/franchisee Margaret Vierra. “You use depreciation to decrease your tax burden, since you are lowering your overall taxable income. But it’s important to understand that depreciation does not affect your cash flow or your actual cash balance, since it’s a non-cash expense.”
To illustrate how depreciation on property can lead to tax write-offs and save money, Vierra lists the following two tips:
No. 1: Straight-line method. Using this method, one will depreciate the property an equal amount each year over its useful life. “To come up with the annual amount you can depreciate, subtract the asset’s salvage value (the amount you could get by selling it at the end of its useful life) from its cost, and divide that figure by the number of years in its useful life,” said Vierra.
No. 2: Accelerated method. With this method, one will be able to take larger depreciation deductions in the first few years of the property’s useful life, and smaller deductions later on. This is the method most commonly chosen by small businesses, according to TurboTax. When an investor has used all the depreciation deductions on a specific property, then it may be the time to consider selling the property and affecting a “1031 exchange” for another property. They can claim the depreciation deduction on the new property and start the 39-year clock all over again.
“Depreciation is something that should definitely be appreciated by real estate investors,” concluded Vierra. “But since investors would rather spend time growing their real estate investments than figuring out complicated tax rules, hiring a tax professional is likely a smart move.”