Depreciation and Why It Matters For Real Estate Investors

Are you looking for a great way to invest for retirement? Do you need to find a reliable source of income? If so, then you should be looking at real estate investing. This is one retirement vehicle with consistent and reliable returns no matter what the economic climate.

Why Real Estate?

Most people love real estate because it is tangible. However, another important aspect is that it is necessary. Fancy cars and diamond rings come into and out of style due to the economy. However, a roof over your head is something that people always need no matter what.

Additionally, real estate is:
• Easy to liquidate for cash because it is tangible
• Almost always appreciates in value
• Has a high income potential, especially with multifamily dwellings
• Passive income source
• Income can be relatively predictable with steady returns you can count on
• Income is more insulated from inflation and other economic factors
• No annual fees or broker expenses
• Increase of return through depreciation

What Is Depreciation?
Depreciation simply means that the value of a given asset will go down over time. You see massive depreciation when you buy something electronic. For instance, if you buy a computer at a store for $1000, you would not be able to sell it for nearly that much online the next day.

Why Is Loss Good?
In real estate, however, depreciation (or loss), can actually be a good thing. Here’s why.
Everything inside of an investment home depreciates. Think about appliances, fixtures, carpeting, paint, roofing materials, and more. The only thing that does not depreciate is the land.
As your building depreciate, your net income is reduced, and thus your taxes go down. This can help you save thousands of dollars per year on your taxes by reducing your income bracket. Because of these tax deductions, you are able to make even money despite having your property lose value.
Put another way, the land you purchase will increase in value over time. However, everything built on the property such as homes, garages, etc will depreciate. So, even though you are seeing gains in property value, you are seeing depreciation in real property which will lessen the tax burden.

What This Means For You
When you buy real estate and create cash flow, you can do two things at once:
1. Reduce your taxable income by the depreciation allowance
2. Gain appreciation value for your property
This increases your income by simultaneously allowing you to increase the money coming in due to higher rents while decreasing the taxation value. There isn’t another real estate investment that does this or has these other great benefits.

To qualify for this deduction, you need to:
• Own the property
• Use the property in an income-producing capacity
• Property must have a beneficial life of more than one year

As you think about investment strategies for retirement, keep real estate investing in mind. Learn how to use the power of both depreciation and appreciation simultaneously to keep your returns high and your taxes low. Call REKI today to learn how you can get started in real estate investing for your retirement future. Let us help you see the clear advantages real estate investing has over other long-term investment opportunities.