How To Lower Your Taxes by Maximizing Property Depreciation
This is a tutorial on how to increase your “depreciable base”. What this means is you can lower your taxes by exchanging property you already own into a new property where you will get a higher depreciation writeoff. Here’s an example:
Let’s say you own an investment property in Carlsbad. You paid $300,000 for it 7 years ago, and now it’s worth $600,000. You did great on the appreciation, and now you can put that equity to work to increase your tax writeoff. Here’s how it looks right now:
Tax writeoff = $200,000 depreciable at 3.636% a year = $7272. At a 40% tax rate, you’re saving $2,908.80 a year in taxes. (This calculation uses a 2/3 value for the improvements, 1/3 for the land.)
Now lets say you exchange that property and use the $300,000 equity to put 20% down on $1,500,000 worth of real estate. This property could be an apartment building, or several single family residences, or any combination. The point is, you now can depreciate $1,000,000. So the numbers now look like this:
Tax writeoff = $1,000,000 depreciable at 3.636% a year = $36,360. At a 40% tax rate, you’re saving $14,544 a year in taxes!
This is called increasing your depreciable base.
Disclaimer! I’m not qualified to give tax advice. You need to check with your tax professional to see if it really would work this way in your situation. Some people have limits on the amount of depreciation allowed. This is only an example to show you the possibilities.
If you’d like to discuss some strategies for your real estate investments, call me any time at 760-889-2272.