The Depreciation Tax Benefit

[Scott Lester]

I'm putting together a simple LLC to bring a partner into two 4 plex's I'm buying. I typically pay a 40% tax rate so I always include the annual depreciation amount x 40% as part of my cash return. If I'm doing an LLC and 50%/50% deal with my financial investor (he'll put in the money, I'll buy, rehab and manage the deals) should I include the depreciation benefit in calculating the returns? Also, what kind of cash on cash are you guys seeing as typical or what's market for a check writer to expect in a situation where they don't do any work but sign a PG with the bank?

[Danny Randazzo]

@Scott Lester I would not include the depreciation benefit when calculating return because every individual has a different tax scenario. For example, your investor could use a self directed 401k or IRA to invest and those vehicles don't get depreciation benefits. Also, your investor could be a working professional and have passive investment losses capped so they can't reduce income. It's best to leave it out from a return perspective but list it as a reason to invest.