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Are there tax benefits from owning income producing properties?

The simple answer is yes. If you own or partially own an income generating property as in a retail plaza, multi-family apartment home community or any other kind of building or structure that you derive an income source from, you will likely be able to enjoy very nice tax benefits.

How does all this work in general? The IRS basically allows you to have an allotment every year for depreciation on the building structure of your rental property. The land portion is not eligible, but the structures are. So basically the IRS is saying that the wear and tear on the structure and facility and subsequent devaluation of it because of this is eligible to show as an annual expense.

So in example, if your building is worth $4,000,000 in the previous year and this year is has depreciated down to a prescribed scheduled value of $3,900,000, then the $100,000 drop in value is considered a valid deductible expense that you are able to take show as a legitimate business expense on your income statement. You do not need to sell your real estate asset to be eligible for this. This deducted depreciation amount then in turn lowers your net bottom of the line profit which ultimately lowers your own personal tax burden.

In this above example if you owned your income producing building outright and made $210,000 on the net rental income (based on a 6% cap rate), the $100,000 you had in depreciation would come right off the top of that amount. Instead of owing income tax on the $210,000 of rental income, you instead only owe income tax on $110,000.

In comparison, if you had that same $3,900,000 asset in cash at the bank making 4.5% interest you would come out with a net annual interest income return of $175,500. Interest income and rental income are both considered as fully taxable income. In the scenario of the cash only, you would not receive the depreciation benefit and your full return on investment of $175,500 would be 100% completely taxed as income, nothing there to deduct off the bottom line.

Also in comparison, if you had the same $3,900,000 in the stock market and let's say you netted 6% return on investment (if you didn't lose your shirt) and you sold all your assets off at the end of the year. Your $234,000 net gain would be fully subject to capital gains taxes, albeit capital gains taxes currently are at a lower percentage of tax rate than current income tax rates. However, you again would still be paying taxes on the total amount of the $234,000. There would be no depreciation to help offset this taxable amount as is in the case with an income producing real estate property. The depreciation on income properties does not last forever. Ultimately you will eventually be fully depreciated on the asset. However, until then you can enjoy the benefits of depreciation on your building! After, that it's time to sell and start all over again with an another building somewhere else.

The above example illustrates approximate estimates to help you get the gist of how this all works. The tax laws are always constantly changing. You will need to check with the IRS and your CPA to project exact amounts and estimates of a depreciation schedule when you are planning to purchase or become an investor in a retail plaza or rental income building.

Risk wise, rental income properties are not always a 100% guaranteed return on investment. There can certainly be unexpected vacancies. There can also be some occasional expenses that are not passed directly through to the tenants and have to be absorbed by the building owners. Experience and expertise are very important with managing risk with any investment. However, in our opinion if the risks are somewhat apple to apple amongst the various possible investment vehicles out there, the depreciation benefit from owning rental income property is almost like a handicap given in your favor that can typically offset any unexpected issues and will likely bring you out way ahead of the game if you know what you are doing with real estate.

Finally, on top of getting the valuable offset of depreciation on your rental income properties, real values do typically appreciate over time. So in general, you also usually receive the added benefit of an asset valuation increase. Plus, if you are holding a mortgage, you are also tending to increase your equity amount in the real estate asset over time by paying down these loan debts. We at Alan Development have enjoyed all these benefits with our own properties over the past 30 years, in particularly the benefit of being able to deduct a large amount off our income taxes every year with the offsetting of depreciation from our building structures.

We hope this helps you understand better the concept of how depreciation on your building assets can be a huge tax saving for your personal net income.

Feel free to contact us with any questions you may have.

We are looking for potential business partners!

We want to find business partners and qualified real estate investors who will come in on projects with us that mutually make sense where we can all come out ahead and make good money (and all take advantage of getting depreciation offset from your return on real estate investments.)

Feel free to email, text or call us with any questions about any of our media articles or any questions you have about being a potential business partner or investor with us.


Greg Arbutine

Alan Development Co-Owner

Invest in real estate with along side with us at Alan Development! We are the real estate experts that you can trust.

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Feb 07
Rated 5 out of 5 stars.

Very interest article!

  Since 1992, Alan Development has been procuring land and developing  commercial, mixed-use and multi-family projects.    Our company also acquires existing buildings and turns them into viable income properties.   
We do projects completely on our own or partner with corporations, investors, lenders or private individuals.   
Contact us today to discuss investment and partner opportunities. 
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