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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 and investor, and I'm your number one source for real estate advice online. In this short video, I want to talk about depreciation. I have received some questions from my subscribers on YouTube and Facebook about depreciation. Specifically, new investors who want to understand how depreciation affects their portfolio, tax returns, and cash flow. So, in this video, I will explain how depreciation impacts your tax return and cash flow. Depreciation is a deduction that does not involve a cash outflow expense. This is the key difference between depreciation and other expenses in real estate investing. Depreciation actually reduces taxable income, which is where it benefits you the most. Let me demonstrate this with a simple example. Let's assume we have a property worth $100,000. The income generated by this property is $10,000 per year, or $1,000 per month in rent. The property is vacant for two months out of the year, and the expenses for this property total $4,000 per year. This leaves us with a profit of $6,000 per year. Without depreciation, this $6,000 profit would be taxed at your applicable tax rate. Let's assume it's 30% for this example. So, you would owe $1,800 in taxes, leaving you with $4,200 in profit after taxes. Now, let's see what happens when we include depreciation. Using the IRS code in the United States, real estate properties are depreciated over 27.5 years. So, the depreciation expense for this property would be $3,600 ($100,000 divided by 27.5 years). Subtracting this depreciation expense from the profit, we are left with $2,400 or 2.4K in profit on paper. If we apply the 30% tax rate to this profit, you would owe $720 in taxes, resulting in a profit of $1,680 after taxes. This is significantly higher than the...