www.akerahomes.com
mfrentz@akerahomes.com
Remember: Please share this article if you find it enjoyable
Depreciation is a Good Thing?
With real estate, depreciation can be one of your greatest assets. Did you know that real estate is, as far as I can ascertain, the most tax advantaged investment in Canada? I could be wrong with this as I don't know the ins and outs of the energy sector and everything going on there, but as far as what the average person can afford and get into, there is no competition. Not only do I receive a monthly paycheck for investing the banks money, or gain from an asset that acts as a hedge against inflation, or have someone else paying down my borrowed money and the interest on that borrowed money... I also am able to pay less in taxes each year because of my investment in real estate.
I would like to warn you at the beginning of this entry that I am not an accountant. What that means is that I cannot offer accounting advice, nor should you base any decision on what I am attempting to teach you on. What you should do is take these ideas and speak with your accountant about them. If your accountant doesn't have any idea what you are talking about or simply shoots down the ideas as terrible, maybe it's time to find a new accountant. The reason I suggest this is that full time (and very successful) investors are using this strategy. If they are using it and your accountant doesn't know or understand the idea, they may not be the right person to work with when it comes to investing in real estate.
Each property has two parts that you are purchasing: land and structure. The land value goes up and/or down with the market and offers little in tax incentives, but a portion of the structure can be written off as a business expense each year; 4% per year of the remaining value to be mroe precise. I'll give an example:
If you were to purchase a piece of property for 300k and it was determined the value of the structure was 200k, you could write off 8k worth of income in the first year (4% of 200k is 8k). In the second year the remaining value of the structure is 192k, so in the second year you could write off $7,680. In the third year, $7,372.80, etc. You can also write off any of the interest you are paying on the mortgage (remember that interest payments are highest in the first few years of ownership and that someone else is making these payments for you). A third area you can write off is maintenance expenses. There are others, but those are the main three. The beauty of this is that you are only counting the income you make from a rental property over and above all of your expenses. If, after all expenses, you make 5k in cash flow in your first year of ownership, you could write off the entire amount through depreciating your asset. What could you do with the other 3k available in tax breaks? Well, one idea is to write it off of your other income that year (earned income from your regular 9-5 job). Are you beginning to see what I mean by depreciation being a good thing?
Some Ideas to Take into Account
I have briefly outlined an idea here in very simple terms. With taxes few things tend to be as simple as they appear and this is true of depreciating your property for tax purposes. Remember to speak with your accountant!
Something I often hear from people is that if they depreciate the asset at 4% per year, they will have to pay more in capital gains taxes when they sell the property. While this is true, the fact is your depreciation strategy should depend on your overall investing plan and not on fear. If I save money on taxes for the next 25 years and then sell the property, I can always use the money I've kept from taxes in the meantime to purchase more investments. I can also reinvest the money I make at the end of those 25 years and depreciate my new investments to offset taxes. Another ideas is that I may not want to ever sell my property... If it is cash flowing and is finally paid off and I am making a lot of money from the property each month and year, why would I sell it? It doesn't really make sense to sell off property that is giving you money each month without much work from yourself if you ask for my opinion. What I would do is keep each property and will it to my wife and kids. If my kids need to sell off one of their inheritance properties to pay for the taxes from another 4 or 5... are they really going to complain about that situation? They've just been given 4 or 5 cash flowing properties and I don't see that as a negative at all.
Another idea to consider is how you own the property. If you incorporate and structure everything properly, you can take even greater advantage of real estate investing by being taxed in a lower bracket. You are rewarded for simply owning and renting out houses. Again, talk to your accountant and learn all you can about this so you can make it work best for your individual situation.
Some people are afraid to make money in real estate. Why? You can make tax free money, so why would you not take advantage of it? I have heard of many individuals who purchase properties that don't make any money because they want to use the property for its tax advantages without having the property eat into those tax advantages. While there may be reasons I don't fully understand, my basic response is: why not make money that may not be taxed while receiving tax advantages in other ways as well? Both paying less in taxes and making more money sounds like a better idea to me. No criticism for those choosing to do this, it simply doesn't make sense to me. I've even heard of people who will purchase property that loses a substantial amount of money each year! Like I said, I've heard some of the reasons, that doesn't mean I understand why someone would choose to lose money when they can make it instead.
I invite your response to this blog. Please make a comment and challenge me or share what you are finding helpful. I'm hoping to begin conversations, not end them by pretending to know all things. Let's talk.
If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html
No comments:
Post a Comment