Depreciation is important because it helps you keep more money in your pocket, instead of sending it off to the federal government at tax time. This is a fantastic method used to mitigate your overall tax burden, so you’ll want to know exactly how it works.
Per the federal government, every year for 27.5 years you can claim depreciation on a property to offset rental income. This is because the government recognizes that things fall apart over time, and the value of your property will decrease.
Let's say you own a rental property valued at $50,000. Here's how you would calculate depreciation on that investment:
$50,000 / 27.5 years = $1818
That's $1818 you can claim on your taxes every single year for 27.5 years to offset your overall tax burden! In this scenario, let's say your property brings in $5000 every year in rental income. Instead of paying taxes on the full $5000, you get to subtract your depreciation!
$5000 annual rental income - $1818 in depreciation = $3182
Wouldn't you rather pay taxes on $3182 than $5000? It's a no-brainer! That money adds up every year, for 27.5 years! That's why depreciation has incredible implications in real estate investing.