Explaining Depreciation For The Real Estate Investor

Asset - Explaining Depreciation For The Real Estate Investor

Good afternoon. Now, I discovered Asset - Explaining Depreciation For The Real Estate Investor. Which is very helpful if you ask me and you. Explaining Depreciation For The Real Estate Investor

Recently, a client asked me "So what exactly is depreciation?" I hypothesize that depreciation is a notion poorly understood by many non-accountants. As a non-accountant myself, I had only the vaguest insight of depreciation until one night while company school when, finally, I saw the light. I'd like to present here a nutshell depreciation. The concepts are the same regardless of the type of asset in question, but here we'll focus on real estate...

What I said. It isn't in conclusion that the actual about Asset. You check out this article for info on what you want to know is Asset.

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Generally speaking, an old asset is worth less than a new asset. Why? Because things wear out. As an example, I'll use my very first car, a 'hip' Plymouth Volare handed down to me from my grandfather. When the Volare was a brand new car, it was worth 100% of its purchase price. By the time I got it many thousands of miles later, it was worth somewhat less than that. And then by the time I had passed it off to my brother, who passed it off to a cousin, who abandoned it somewhere in the swamps of New Jersey... Well, it wasn't worth much at all by that point.

In accounting, when an asset is first purchased, it is placed on the equilibrium sheet at its full purchase price. 'Depreciation' is the means by which you continually adjust the value of the asset downwards, so that the asset's book value more intimately reflects reality. Uncle Sam is glad to lend a helping hand, by decreeing the rate at which you are allowed to depreciate a given item. Why should Uncle Sam care? Because whenever you depreciate an asset, your write-off of its value goes to your income statement as an expense, which reduces your income and therefore reduces your tax burden. Thus, it is in your interest to depreciate as fast as possible, while it is in the Irs' interest to make you depreciate as slow as possible.

It's foremost to remember that depreciation is entirely a 'paper' rather than a 'real' transaction. No cash ever changes hands. For this reason, depreciation can't sway cash flow. That's why when you look at a cash flow statement, you'll see that depreciation is added back to net income (depreciation was deducted from income on the income statement, so it needs to be added back on the cash flow statement).

In the case of real estate, it gets a itsybitsy more complicated. When you buy a building, you are typically buying both the construction as well as the land it sits on. Structure wear out, but land doesn't. As a result, you can only depreciate the quantum of the purchase price which can be attributed to the building. Where are you supposed to get that number?... The property's appraisal, where the building/property split will be included.

Once you know the construction value, you can apply the Irs' construction depreciation schedule. Unfortunately, the asset won't be depreciated and will sit on your books at full value until you sell.

I hope this gets you started on a best insight of depreciation!

I hope you have new knowledge about Asset. Where you may put to utilization in your everyday life. And just remember, your reaction is passed about Asset. Read more.. Explaining Depreciation For The Real Estate Investor.