Jun. 2, 2008 - TOP FIVE REASONS WHY I LOVE REAL ESTATE (Part 2 of 2)
Okay, Part One of my list covered the basics as to why real estate is still (and will always be) an excellent mechanism for investors like me. Part Two is somewhat of a continuation along those lines, so here goes:
2. Depreciation.1 Even though depreciation goes hand-in-hand with taxes, it is so special that it deserves its own place in the sun. I consider depreciation to be the last major tax shelter out there and if used correctly, can make your heart flutter and your wallet fat! One of the most striking examples of this is an 80 year old widow and her newly-acquired apartment complex. To look at her you’d think that she is the classic, fragile grandmotherly type…and you would be so wrong. Because of depreciation, she will net slightly over $1MM in the next 7 years and pay almost nothing in taxes.2 Now that’s a savvy investor.
1My good friend Adam Skarsgard suggested that I "beef up" my definition of depreciation just to be on the safe side. Depreciation is a non-cash expense which reduces taxable income, although not cash income, and by definition results in lower annual taxes. The end result is often a cash flow positive property that may not be taxable because of the depreciation expense. At work, if you have $5,000 in montly income, you will pay tax on $5,000. In real estate investing, if you have $5,000 in monthly income, you will be taxed on something less than $5,000 and there may be no tax at all, because of depreciation expense.
2She employed a cost segregation study to front-load her depreciation expenses to offset the income generated by the property. If you think something like this could benefit you or your clients, please be smart and seek out professional advise before employing/recommending such a course of action.
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