On A Fence Called Depreciation

Depreciation can be both a positive as well as negative tool utilized by real estate investors. Depreciation is a paper expense that reduces your taxable profit, by the IRS.

Depreciation in the scale of things, is a micro issue in the overall investing bubble. It is used in the short term to increase investors cash flow. This is great in the sense that, with more available cash, an investor is given more options. The time value of money is a very important concept, in understanding depreciation. If a dollar today is worth more than that dollar, five, ten, or twenty years from now, the longer you defer paying taxes, the more investments you can make today.

However, it would be wise to set aside some of this offset income for the future if you do not plan on making the property a life time investment. The IRS will recoup these cost if the property is sold.

A negative aspect would be, once again the time value of money. The price paid to recoup the cost of depreciation will be greater later, in viewing the long term. Unless depreciation is maximized by segmentation, and/or acceleration, you will end up paying more.

Another side of depreciation the might be negative to an investor, could be the fact that depreciation does not include the land value..

ie.. Joe investor specializes in raw land acquisitions. Joe than leases said land to an equestrian center owner. The land has no builds and is strictly used to let horses range. Joe would be unable to depreciate this land.

Two things are sure in this life, death & taxes, depreciation can be used to delay the latter. At the end of the day someone will pay.