Income Tax Savings

I am reading a book which talks a little about income tax savings where you devalue the property over 27.5 years or longer. If your property is worth 600,000 and you devalue over 40 years, then you can claim 15,000 a year on your income tax and say that the building is devaluing.

How many of you guys do this? My parents own a business but I am sure that they do not know about this. They have their taxes done by an accountant and what are the chances that the accountant doesn’t know about this either?

It’s just depreciating assets. For Real Estate held, you can do a straight line depreciation for 27.5 yrs on single family homes and 39 years on commercial property.
The accountant should definitely know about this. If they don’t, find another accountant.

I am not a tax professional and you should use one before doing anything tax related, that being said most people do this. If you have a $100,000 house with a $600 mortgage and get $1,000/month for rent. That gives you about $3,600/year in income. If you subtract the land and depreciate the house over 27.5 years that is about $3,600. What means that the rental income is tax free. If you do that 10 times you have $36,000/year tax free income.

When you sell the property you have to do depreciation recapture and add it back in. But if you do a 1031 exchange you don’t have to recapture the deprecation. That keeps it going until you die. Then when die your beneficiaries inherit your real estate with a step up in value. That means it is inherited at the current value. That means they don’t have to recapture the deprecation. That means if you do it right you never pay taxes.

Why do you think rich people have real estate?

Don’t forget - if you sell the property, you have to recapture the depreciation and claim it on your taxes…it is a deferal, not a write off!


Exactly! it will be recouped when you sell. The IRS always wins

We need to clarify what you are being told. You can only depreciate rental property that is in service as a rental, and/or, property that is used in your trade or business.

If the $600K property in your example is your primary residence or a vacation home, then you can not take a depreciation expense.

How many of you guys do this? My parents own a business but I am sure that they do not know about this. They have their taxes done by an accountant and what are the chances that the accountant doesn't know about this either?

Everyone with allowable depreciation should be taking it each year. Even though your parents have a business, they can’t depreciate anything unless they own the property that is used in their business. Do they own the building where their business is located? If not, if they just lease the space (such as in a shopping mall), then there is no depreciation deduction.

The step up in basis was eliminated on Jan 1, 2010 when the federal estate tax went to zero. As a general rule, property inherited in 2010 is inherited at its “carryover” basis or its fair market value, whichever is LESS, same as the rule for gift property. There is an exception to the general rule that permits basis step up for estates valued less than $1.3 million, but that exception is only good for 2010.

We don’t know what will happen to the basis step up rule when the federal estate tax unified credit resets to $1 million next year. Congress has to write law to reinstate the basis step up. I would not count on that with a Congress looking for any revenue generator it can find.

1031 exchange

You should never sell a house for money. Most people don’t need big slugs of cash very often as long as they have cashflow. You may, however, want to sell a house for strategic reasons. That house may be getting old and will need capital repairs soon or to move to another neighborhood with better rents. If you sell that way you should use a 1031 exchange to get another house. That keeps you from having to recapture the depreciation. If you need a big slug of money instead of selling the house to get at the equity you should refinance it to get the equity out of it. That way you get the cash and still have the asset. As you pay down the mortgage and the house appreciates you will build more equity until you need a slug of cash again.

Back to basics here guys. First figure out why you are doing this. You are creating a stream of income that allows you to live your lifestyle without having to work. That is my definition of rich. If it takes you $3,000/month to live and you can cash flow $300/mnth per house you need 12 houses at any given time. It may not be the same 12 houses from year to year but you need 12 houses. If you sell one of then and take the cash you are eating your seed corn. Eventually you will be out of business.

This is why I joined this site. So much more informative than a crazy book. Thanks all. I’m still gonna finish the book though.

You know, I have been thinking. I need to talk to a Realtor to find an investor / landlord, that will guide me. I’ll paint his entire house (previous post. had to have read it to understand) if they will point me.

I’ll be helping habitat for humanity build a house on saturday. I hope to learn something and meet a few peeps.


If you want someone to help you, why not use these forums? Experienced investors abound here and are more than willing to answer your questions. Update your profile to include your city/state location. Sometimes the answer to a question has a location specific response and knowing your location can help us give you better answers.

also keep in mind that depreciation is recaptured at disposition regardless of whether you actually took depreciation expense in prior years or not.

the rule is “depreciation taken or allowed”

so always take depreciation.

Just to drive Mark’s point home, consider the following.

Let’s assume you have a rental property with $3000 in net cash flow at the end of the year. This rental income is taxed at your ordinary income tax rate. If you also have $3000 in depreciation, the depreciation expense reduces your taxable rental income to zero without really taking any money out of your pocket.

By not taking the depreciation expense that was allowable, you are effectively taxing your rental income twice. The first time is when you file your tax return and pay tax on your rental income. The second time is when you sell the property and the IRS taxes the allowable depreciation that you did not take.

The lesson here is to always take the depreciation expense allowed on your Schedule E. You pay less in total taxes in the long run.

NEW INVESTORS: Listen well - there is an important lesson here from two very experienced professionals!!!

Re-read their posts as many times as it takes to understand: When you sell the property, you MUST pay the tax on the ALLOWABLE depreciation, regardless of whether or not you declared it previously. Use your TAX ADVANTAGES!!!