What Are Depreciation Deductions?

Posted on January 30, 2019

Commercial real estate provides investors will an opportunity to create passive income from an appreciable asset while at the same time reducing the amount of that income subject to tax, thanks to depreciation deductions.

Depreciation refers to an asset’s decline in value over time due to general wear and tear. Under U.S. tax laws, commercial property, excluding land, is depreciated over a 39-year period. This annual reduction in the property’s value is deductible by property owners, thereby decreasing their taxable income. For example, a taxpayer who in 2019 has $1 million in income and $400,000 in depreciation deductions will be taxed on only $600,000 rather than $1 million. Therefore, while the investor can enjoy higher income from a property’s appreciation in value, he or she can also increase income by claiming depreciation deductions that reduce the value of the property that is subject to income tax. Depreciation begins in the year in which the investor puts the property into service, and it ends when the investor sells the property or when he or she fully recover the costs incurred to build, buy or renovate the property.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.