Depreciation

In most businesses, the IRS taxes your net cash annual income. But when you own rental properties, you can shelter (protect) much of your cash flow from taxes by using a noncash tax deduction called depreciation.

Say your apartment building (exclusive of land value) is worth $500,000. Your pretax cash income from that property equals $20,000 per year. But you don't pay taxes on that $20,000 of income. You only pay taxes on $1,950 ($20,000 of income less $18,150 for allowable depreciation).

What happens to that $18,150 deduction for depreciation if, say, your rental property yields only $10,000 a year in pretax cash income? In that situation, you may be able to write off (deduct) that $8,150 ($18,150 depreciation less $10,000 property income) of unused "loss" from the taxable amounts you earn from your other taxable income (wages, business profits, interest, dividends).

Was this article helpful?

0 0

Post a comment