Depreciation has a positive impact on cash-flow while not directly impacting cash-flow.
Confusing? Could be!
Depreciation is typically a tax deductible expense, but not an actual monthly operating expense. As such, it does not directly impact the cash flow of a business or an investment property until tax time. In other words, there’s no monthly bill payment made for depreciation, as there would be in the case of a mortgage payment, insurance premium or regular property maintenance. As a tax deduction, though, it can greatly lessen the amount of the taxable income from a business or investment property in an amount calculated by the appropriate depreciation schedule of the particular asset.
Now, I must say, as far as specific tax advice, I always defer to a qualified CPA*. There are many that I know that are amazing at what they do and I’m always making introductions.
Perhaps you own an investment property that you’ve held for 10, 15 or 20+ years. Your current property has very likely appreciated significantly in value over that time. You’re also 10, 15 or 20+ years into your depreciation schedule (based on your lower acquisition value of the particular property). Should you sell your property and realize your capital gains, you may have a very large tax bill! What if you could roll over your significant capital gains into a new, higher revenue producing investment property and start leveraging depreciation all over again? It might be beneficial to look at the possibility of completing a 1031 tax deferred exchange your current property and acquire a different investment property that could potentially provide you with more usable cash-flow and maybe lessen your annual tax bill.
If a possible “trade-up” interests you in any way, please contact me. We can take a deep dive into the opportunities that exist in today’s market, consulting with appropriate qualified professionals to connect all the dots.
Lionsgate Real Estate Group
*Disclaimer – I do not provide my clients with tax advice. I ask that you please consult with a qualified professional, like a CPA, for any tax related questions.
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