Did you know that when you buy an investment property you are allowed to take a deduction on your taxes called cost recovery, better known as depreciation.
Depreciation is defined as a reduction in the value of an asset with the passage of time, due in particular to wear and tear.
When you buy a piece of investment property the building, parking lot, storage buildings all of the improvements will depreciate.
Let’s look at a quick example. You purchase a property for 1 million. You separate the improvements (the building) from the dirt. Dirt never depreciates. So for this example your improvements are 700,000 and the land is worth 300,000. You then divide 700,000 by 39, the amount of years you are allowed to take the deduction for on non-residential property. So in this example you have depreciation worth $17,949.00. That amount now becomes a paper loss on your taxes.
Lets think about this for a second. You collected 100K of income from this property, but you only pay taxes on 82K.