The time in which we live is often referred to as the Information Age. It’s an apt description. This is the first in a short series on answers for which many real estate investors don’t have the questions. We’ll begin with a little known IRS rule, along with a pretty cool alternative use for depreciation.
First, understand the nature of depreciation — it’s a paper loss, not a real one. However, the benefits are as real as it gets. There’s a dark cloud to that silver lining though.
As long as your job income (Ordinary Income in IRS-Speak) is under $100,000 a year you’re fine as wine. You can apply up to $25,000 a year of available depreciation against your ordinary income. But as soon as your ordinary income exceeds $100,000 the code begins decreasing that $25,000/yr — until ya make $150,000 or more, than it’s disallowed altogether as a tax shelter against job income.
Yeah, right when you need it the most, they take it away from ya. Figures, right? There’s some good news though. Here comes an answer to a question my experience has shown most folks don’t know to ask.
If your depreciation exists, but you’re barred from using it, what happens to it?
Simple — it sits on the shelf gathering dust. It doesn’t disappear though — it’s waiting to get back in the game. The question is when — and more importantly, why and how?
Let’s say it’s time to move a property to greener pastures, as the market is speaking to you. It’s grown in value nicely, so there will be a capital gain. (Here it comes.) The unused depreciation can be used as a tool to ‘offset’ that capital gain, or part of it if there’s not enough. (A 1031 will take care of the rest.) This results in tremendously beneficial consequences for your next property(s), as your ‘basis’ is affected in a very positive way.
But that’s another post altogether. Suffice to say, the ability to take unused paper losses to offset real capital gains is a powerful tool to have at your disposal. I’ve made use of this strategy countless times, and it never fails to put smiles on faces all around.
Contact me to find out just how you might be able to apply this to your Purposeful Plan for retirement. 619 889-7100 will find me. Have a good one.
Related posts:
- Real Estate Investing — Capital Gains Taxes — The Economy
- Realizing Big Time Capital Gain — Payin’ Little Or No Taxes — How He Do Dat?
- The Facts About Owing Free and Clear Property in High Priced Regions
- Everything’s Free & Clear — Rentals Included — Yet Still Taking Home 25-35% of What’s Easily Attainable
- Retired Real Estate Investors — Lotta Income — Alas, Lotta Taxes Too
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