Real Estate Book
How does depreciation on real estate work?
Ive been reading a few real estate books here and there on investing, I understand it for the most part. When they touch basis on Depreciation and such, I get confused they say you can depreciate the land, building, and things like the pipes and wiring. Can anyone who invests in real estate, understands depreciation, and who uses it kindly explain it? Please can example(s) be presented?
–Thanks
Hello,
It is great that you are talking about investing in Real Estate and how depreciation affects. As has been pointed out by others on this question, you can depreciate improvements, but you cannot depreciate land. Land will appreciate.
When you consider an income property, depreciation is the notional expense that will help you setup reserves for replacing the improvements at the end of life of the asset. It certainly is not a cash expense. But IRS allows you to decrease the income by the amount of depreciation. So it is a great tax play. You can hold on to the cash generated from Depreciation and keep investing it until you need to replace your improvement. So you are using the tax money for no interest and no taxes.
When you depreciate the property, the cost basis also reduces. If you were to make additions to a property, the cost of the property would increase. In case you depreciate a property, the cost basis would decrease. When you sell the property, your profit will be the difference of the selling price and the cost basis, not the purchase price. The IRS will then tax you for capital gains based on the appreciation as calculated above.
If you closer to San Jose, CA, Pl. feel free to contact me.
Disclosure: I am a Licensed Realtor working with Century 21 El Camino in Sunnyvale, CA.
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