Socratic questioning, well executed, can lead to quick and in depth learning, at a high level. Ever wondered if depreciation can be ‘planned’?
Transcript: Hi this is Jeff Brown the “BawldGuy”. Today, we’re going to continue talking about the lessons my mentors taught me using the Socratic questioning method of learning. One of the things that I found out over time in the internal revenue code is that they often prohibit investor tax payers from using depreciation, which is really when you boil it down just tax shelter against their ordinary income. For the record, ordinary income is what the IRS calls your job income. Now, the point here is I’m going to tell you that sometimes, a matter of fact most of the time, being prohibited from using the available depreciation you have against your ordinary income is really a pretty cool blessing in disguise, and here is why. If you own a lot of properties and you have a lot of unused depreciation that adds up over the years, it’s possible down the road for you to have a capital gain that you can offset with that unused depreciation. Now, that sounds really cool and it is, but here is something that makes it even better. Since you know this going in, you can plan to make this happen. What’s better? You don’t even have to have an appreciated value to make it work. You can have taxes that you owe because of the way the IRC formula makes you have capital gains even without much appreciation, sometimes without any. You’re going to have depreciation recapture taxes many times, not always, but the idea is since you know about this, you can plan to get a bunch of tax free cash because of the offsetting pile of unused depreciation you’ve warehoused. Now, that’s what I mean about a pretty cool blessing in disguise. It’s about knowing, what you’re going to do before you do it, and we call it here purposeful planning. This is Jeff Brown, the BawldGuy. Thanks for joining me today. I’ll catch you next time.