Depreciation is your friend when it comes to owning rental property. First, because it is an investment home you get to depreciate it over the course of 27.5 years. (Well, not exactly, but the government is involved.)
Let’s just say you purchased said rental property in January of 2008. The property is a duplex in Olathe and was purchased for $200,000. Looking at the property tax breakdowns for the neighborhood we can see that the land value of nearly every duplex on the block is about 18% of the total sales value. So we’ll subtract 18% from the $200,000 paid for our little duplex and we’ll have the amount we can depreciate.
Now, if you purchase an investment property eligible for depreciation in January you get to “write down” 3.48% of the depreciable (is that a word?) value of the rental. So let’s figure quickly:
$ 36,000 – (18%)
So we have a depreciation number of $5,707. You get to subtract that, along with the interest you will pay on debt service, from the Net Operating Income. And whatever that number is is the number you get to tell the government you made or lost on your investment property.
Let’s make this more simple. Take your tax bracket (28%? 33%?) and multiply it by the $5,707 number.
If you are in the 33% tax bracket you just saved yourself about $1,883 on your taxes for 2008. That’s real money.
Of course, a professional accountant or CPA might get squeamish about some of the terms I’ve used or how I’ve described it. And there are rules you must follow and consequences for the benefit. But I’m not off on my numbers. However, always check with your professional tax planner/adviser. I think he’ll tell you pretty much the same thing. Depreciation is one of the 4 Benefits of Real Estate Investing.