We’ve once again moved into another new year, and many investment property owners will be looking ahead to filing taxes – and more specifically, to the deductions that can be used in helping to reduce their taxable income for the prior year.
As discussed in previous posts, certainly most investors are familiar with the fact that the mortgage interest that is paid on any loan (or loans) secured by their income producing property is tax deductible, as are any points that were also paid.
One of the biggest advantages of owning investment property, though, is being able to use depreciation of the property as a tax deduction. This is because, not only are you allowed to depreciate your investment property – but the IRA requires that you do so.
Depreciation is defined as being the loss in value of an asset or a building over time due to wear and tear, as well as physical deterioration and age. It can actually be described as being a “paper loss” and it can reduce your taxable income from an investment property. However, in contrast to property taxes, mortgage interest, insurance, repairs, and utilities, depreciation does not require that you first provide any initial cash outlay.
In some instances, then, the depreciation expense can essentially result in a property that is positively cash flowing still being a loss maker for tax purposes. Another way to look at it is that some investment properties may rise in value, but on paper, their value is going down.
It is important to note that the type of property that you own will determine how long you may depreciate it. For example, in its most basic sense:
- Residential income producing property is depreciated over 27.5 years on a straight line basis;
- Commercial property is depreciated over 39 years, also on a straight line basis;
- Land cannot be depreciated.
Need more information on the tax benefits of owning investment real estate? I can help. In addition to providing property management services to Orlando investment real estate owners, I’m also a CPA. So, give me a call and let’s talk.