Video instructions and help with filling out and completing Who Form 4797 Housing

Instructions and Help about Who Form 4797 Housing

Hi I'm Julia M Spencer I'm a real estate adviser investor and your number one source for real estate advice online with this little short video I want to talk a little bit about depreciation I had some questions from some of my subscribers to my youtube channel to my Facebook regarding depreciation some new investors that wanted to get into real estate investing and didn't quite understand the concept of depreciation and how it would affect their portfolio or in their tax returns or even their cash flow so I wanted to make this brief video to explain those two concepts how does depreciation impact your tax return and how does the appreciation impact your cash flow let's talk about it depreciation is a deduction but not a cash outflow expense that is the big difference of depreciation versus any of the other expenses the thrill estate investing it depreciation actually reduces taxable income which is where it has the most benefit for you and I wanted to demonstrate that with a really simple example let's talk about that let's say we have a $100,000 property in the income that that property generates is 10k per year ten thousand dollars per year let's assume that $100,000 property generates one thousand dollars every month in rent and it's vacant for two months out of the year and basically your expenses for that particular property are of four thousand dollars per year that leaves you with a profit of six thousand dollars per year now if there was no depreciation expense that you could take this property basically that 6k profit would be taxed at whatever you go in tax rate is for this particular example I assumed it's thirty percent and that would be $1,800 so take one thousand eight hundred dollars off the six thousand dollars you're left with four thousand two hundred dollars or four point two K profit at the end of the year now let's see what it looks like with depreciation same property $100,000 same income same expenses same profit now we have this depreciation expense right here six 3.6 k $3,600 and depreciation let me tell you a little bit how I calculate that in the United States RS code real estate properties depreciated over twenty seven and a half years so you would take the $100,000 divided by twenty seven point five years and this right here is a depreciation expense you can take every year on that one property three thousand six hundred and thirty six dollars take that off your profit your depreciation expense now all of a sudden on paper your profit is two thousand four hundred dollars or 2.4 K now let's tax that at the 30 percent if we taxed two thousand four hundred dollars of profit at thirty percent you're left with having to pay 0.72 K and taxes on that property that translates to seven hundred and twenty dollars versus one thousand eight hundred dollars right here what does that mean well guess what we're not taking that $700 off this profit that's right here in this paper we're taking it off the actual profit it's actual profit of six thousand dollars which means in the end your profit left with depreciation expense is much higher than it would be if there was no depreciation expense in fact it's about one thousand dollars more profit now that actually applies if you have positive cash flow on your property so if you had for example twenty properties and they all had they were all kind of like the same way the same income same expenses same value of the property when you bought it and so on and so forth each one of them per year would generate an extra one thousand dollars because of this depreciation expense so at the end of one year if you had twenty properties this right here will translate into 20k of additional cash flow that you could realize because of depreciation now let's assume that this is actually not the right amount of income and expenses and let's say some of your properties have been vacant for a little bit longer than two months out of the year or maybe your expenses are a little bit higher that year or whatever reason and basically what you would have at the end of the year instead of the 6k profit you would actually have zero profit and a lot of real estate investors do this you actually think that might sound really bad but a lot of real estate investors actually tried to break even on their properties meaning the money that they put in is actually the same amount that goes out in terms of expenses so they kind of break even and don't show any positive cash flow and you may wonder why would a real estate investor actually get into that why would a real estate investor buy properties that don't generate cash flow let me tell you why if this profit right here was zero you still have the depreciation expense which means that would make the profit on this kind of property instead of something that would be taxed it would actually be a negative 3.6 k $3,600 negative $3,600 just on that one property per year and depreciation expense now this is the kicker let's say you had twenty of those negative income properties now you think okay I lost $3,600 that's money out of my pocket why would I want to but depreciation is a no non cashflow expense it's not cash that you actually given away it's just an expense on paper so let's say you have twenty properties and each one generated three thousand six hundred dollars a year and negative expensive multiply that three thousand six hundred and thirty six dollars times twenty you suddenly have seventy two thousand seven hundred and twenty dollars of negative income on those properties