Depreciation might sound negative, but real estate investors know that a property’s depreciation plays to their advantage. The premise of depreciation is simple: properties decline over time. By accounting for that anticipated change, investors can include depreciation in their expenses and generate thousands of dollars in savings for that ‘business expense.’
It may be a line in your ledger, but depreciation doesn't necessarily have to affect your cash flow. After all, the value corresponds to the acceptable rate of decline in properties. That is also why experts in the field see depreciation as a tax-efficiency strategy.
To benefit from depreciation, passive investors can explore these two approaches:
Straight-Line Depreciation
In this method, depreciation reflects the same amount for each year. This value corresponds to the expected decline in your built property over the standard 27.5-year lifespan.
Note that the IRS only considers the value of the building, not the land value that is regarded as perpetual. This delineation suits multifamily well, as 80% of the purchase price of these properties comes from the building value.
Accelerated/Bonus Depreciation Rental Property
Depreciation can also be variable, based on the value assessed by third-party experts like engineers. To arrive at this value, the hired expert will evaluate the decline in the individual components of your property: drilling down into the value of windows, plumbing fixtures, and equipment in or on the building, among others.
Under this approach, real estate owners can accelerate the depreciation benefits by up to 50% in the year the property was bought.
While depreciation underscores some paper decline, it’s important to remember that it doesn't affect the resale value of rental properties. When a property gets sold, the depreciation clock is reset, and the process starts over for the new owner. Curious about depreciation as a strategy for multifamily investment success? Get in touch with our team at Makaan Investment Group, and we’ll be happy to assist you with unlocking the full benefits of passive investments in Texas.