Depreciation and large taxable income

[Pandu Chimata]

Hello everyone !

I heard that we can/should claim depreciation (if available) on the rental/business properties every year. Obviously, this will help paying less or no taxes at that time.

However, when you sell the house,  you have to pay taxes on the larger sum since the depreciation amount is added to your gains (assuming the house was sold for a profit).

Then how this is going to help real estate investors unless you use 1031 to defer the taxes ? 

Any thoughts ?

[Mike Dymski]

The deferral of taxes is a huge benefit when those saved taxes are reinvested (likely why we won't see the Donald's tax returns any time soon).  $1,000 in saved taxes compounded at a 10% return generates another $1,000 in income over approximately seven years...compounded at 20% return...it only takes four years to generate the extra $1,000.  If you hold beyond these time frames, the compounded impact is exponential.

Some investors combine cost segregation with bonus depreciation and they don't pay taxes for many years, they reinvest those savings and drive their after-tax returns up.

The tax code is designed to stimulate commerce and this treatment gets investors to transact (which generates income for brokers, inspectors, appraisers, agents, title companies, attorneys, contractors, engineers, regulators...the list goes on).