by on October 24, 2011 7 Comments

What The Heck Is After Tax Cash Flow?

Sometimes we’re so close to something day to day that a question can get us doin’ the RCA Dog impression without warning. One such question is probably one asked of me the other day — which I thought might be on more than just her mind. She asked,

“When you say the ‘after tax’ cash flow is $X, what gets taxed, and is it like my paycheck’s ‘after tax’ sadness?”

Well, sometimes it’s the same. For many however, the after tax cash flow is actually greater than the before tax cash flow.

How can this happen?

Paradoxically, when your after tax cash flow is higher, it’s due, the vast majority of the time, to a loss. It’s a paper loss to be sure, but a loss nonetheless. In this case it’s what’s called ‘depreciation’. Simply put, depreciation is the IRS agreeing that buildings and many of the things inside them, even things appurtenant to the land, ‘depreciate’ in value over time. In other words, they wear out. [Read more...]

Filed Under: Cash Flow, Depreciation, IRS
by on October 19, 2011 2 Comments

Are You Getting the Most out of the Depreciation Available To You?

I think most real estate investors understand how depreciation creates a significant tax advantage. Depreciation is the means that allows an investor to have a positive cash flow while claiming tax losses. I think we can all agree that spending a lot of cash to create tax losses is a less than desirable way of saving money on your tax return.

I suspect though that many investors have no idea just how much depreciation can be taken in the early years of a property’s life. Spreading depreciation out over 27.5 years does help the bottom line, but if it was possible to spread a lot of that depreciation over a 5 year period I think you can see how that might prove to be a far better tax benefit.

Recently I talked about land improvements which are depreciable though land clearly is not. I gave you a taste of what can be carved out as a 15 year land improvement. Clearly, depreciating an asset over 15 years is better than 27.5 years. If you didn’t read the post you might want to take some time to read it. [Read more...]

Filed Under: Depreciation, IRS
by on October 5, 2011 1 Comment

Land Is Not a Depreciable Asset – Or Is It?

One important lesson that every investor learns sooner or later is that land is not a depreciable asset. You may hear it from your tax preparer, a real estate broker, another investor or others. I’m hoping that no one found this out in an audit.

What many might not be aware of though, is that land improvements are deductible. There are many improvements that we make to land. Some of which you might not think of generally as improvements.

Why take the time to make this distinction? [Read more...]

Filed Under: Depreciation, IRS
by on September 6, 2011 Leave a Comment

When Does Depreciation Start? Are You Sure?

Depreciation is an important tax consideration when it comes to investing. I think it is worthwhile to take a close look at when you can start depreciating. Basically you start depreciating an asset on the date it is placed in service. Sounds easy enough but it can be confusing at times.

The easiest way to understand this concept is to go through a couple of examples.

EXAMPLE 1:

An investor finds a duplex and prepares a purchase sale agreement on Jan
3. He closes on the property Feb 16. The property was vacant in January and remains vacant in February. After closing on the property the investor immediately starts work on some renovations. Turns out there were a number of hidden problems and the renovations are not completed until June 15. In anticipation of completing the repair work the investor started listing the property for rent on Jun 1st. Unfortunately it took a couple of months to find good tenants and they move in Aug 1st. What date can be used as the In Service date? [Read more...]

Filed Under: Depreciation
by on August 17, 2011 1 Comment

The Age Old Tug of War Between Schools of Thought – Long Term Real Estate Investing

BawldGuy Here: I first published this piece about six months ago. I was thinkin’ it was time to put it up top again. Hope it sheds some light for ya.

There are multiple schools of thought related to investing in real estate for retirement. Two dominate.

One says you buy property, holding it forever. When you’ve saved sufficient capital to buy additional property, you do — then hold IT for evermore too. The idea is you allow rental income to pay off debt as quickly as possible, arriving at the point of a debt free cash flow machine. Do this a buncha times and you’ve built the foundation for a nice retirement income stream.

Or so the doctrine goes.

The other school’s doctrine teaches cash flow comes from the yield on capital or equity in an asset. The bigger the capital amount or equity in the asset, the greater the income, measured in dollars. The ‘yield’ itself is expressed in terms of a percentage. For example, 7.5%. This commandment says that since the yield is equal, more or less, for a more substantial or less generous figure, why not arrive at retirement with the largest amount of capital and/or equity possible? [Read more...]

Filed Under: 1031 Exchanges, Capital Growth, Cash Flow, Depreciation, Retirement Income, San Diego Property Owners
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