|
Depreciation of Real Estate
Investments and Home
Office related items can be an effective tax shelter
Take advantage of depreciation
as well as special allowances
that allow larger depreciation deductions. Depreciate your
rental property, office furniture, computer as well as the
software you use for your home business!
|
When it comes to depreciation and
your home, there is a lot of information.
One could devote an entire site to the subject. We have given you
an
overview of depreciation and how it relates to your real estate
investment
and home office. For a more comprehensive overview of
depreciation,
the top 3 books we HIGHLY recommend are:
Sidebar |
You recover the cost of income producing
property through tax
deductions. You do this by depreciating the property. The
definition of depreciation is the annual deduction allowed to
recover the cost or the basis of business or investment property
having a useful life substantially beyond the tax year. Depreciation
allows you to recover the cost or the basis of certain property over
the time you use the property.
Depreciation may NOT be claimed on property held for personal
purposes
such as your personal residence, boat, or personal vehicle. If the
property,
such as your car for example, is used for both business and pleasure, only
the
business portion may be depreciated.
When you own business property or equipment that gets worn
down through use, you can deduct a certain amount for
depreciation, representing the wear and tear for the tax year.
Depreciation is commonly known as a "phantom" expense
because it is a deduction that you don't actually pay for. The
kind
of property that can be depreciated on your tax return include
machinery, equipment, buildings, vehicles, and furniture.
Land is not depreciable. As a rule, you can only "convert" the
cost
of land when you eventually sell it, at which point you will
subtract
the cost from the sales price to determine your taxable
gain. So,
when you purchase a rental property and the land on
which the
property is situated, the cost of the land must be
subtracted from
the total cost of the property. Only then can you
determine
depreciation expense for the property itself.
CRITICAL FACTS TO UNDERSTAND
Three basic factors determine how much depreciation you can
deduct. It's critical
that you understand these before reading
the examples in the "General Depreciation Deductions"
section.
First Year Allowances
The general rule for depreciation is
that a business can't write off
the whole cost of certain assets in one year. There are exceptions
though:
General Depreciation Deductions
Recapture Depreciation
When you dispose of property that you depreciated using MACRS,
any gain on the disposition generally is recaptured (included as
income) as ordinary income up to the amount of the depreciation
previously allowed or allowable. This includes any Section 179
deduction claimed on the property and any special depreciation
allowance for Liberty Zone property.
To
learn more about Depreciation Recapture, click here.
Depreciation is a wonderful tax shelter for the small investor. The
money you save today with the tax shelter can be invested to bring
you to your financial goal much sooner.
Click here to leave depreciation and return to real
estate
owner main
|
|
