Depreciation is a reduction in the value of an asset due to wear and tear. Residential rental property can be depreciated over 27.5 years. Commercial properties have a 39 year timeframe. This is a "paper loss" and not an actual income loss. Depreciation allows you to pay less total taxes, 100% legally. Depreciation is an investor's friend since it reduces the tax burden. You cannot depreciate land, but you can depreciate the buildings of the property.
If a residential investment property is worth $100,000, you can depreciate it over 27.5 years, or 3.636% each year. This would equate to ‘losing’ $3,636 each year in income. While the government does NOT charge you $3,636, you are able to write it off as a loss on your taxes, which can help minimize or eliminate your taxes. A commercial investment property depreciates over 39 years. This equals 2.5641% each year.
Commercial investment properties can benefit from depreciation, but can ALSO benefit from the ACTUAL appreciation of the investment. Please consult a CPA, financial advisor, or lawyer for more information as this is not legal, tax, or financial advice.
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