Critical Tax Strategy For Landlords

How to Use Depreciation to Lower Income

by Alex Davis

Woman throwing moneyBy maximizing depreciation deductions, you minimize taxable liability and save money on taxes. Since you cannot immediately write-off the purchase cost of investment property, you must deduct the acquisition cost over the life of the property using depreciation.Most rental owners are able to turn profits after collecting rent and paying rental expenses, so depreciation deductions can be used to turn their profits into tax losses. That’s why rental property is considered such a good tax shelter – because you can report a loss even though you are making a profit.

For example, you collect $12k rent for the year and paid $8k in rental expenses like mortgage interest and property tax. If you took no depreciation deduction, you would have to claim $4k in rental income on top of your regular income… but after a $6k depreciation deduction (typical for property worth $165k), you will claim a $2k loss while still making a $4k profit.

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