How Appreciation and Depreciation Can Help You Maximize Your Real Estate Investment
Let's delve into one of the most intriguing aspects of real estate investment: appreciation and depreciation. In this article, we'll unpack the difference between the two and why they make real estate not just profitable, but also highly lucrative.
Understanding Money's Value Over Time
While we often say "a dollar is a dollar," the truth is, the value of money changes over time. Factors like supply, demand, and investor sentiment influence this fluctuation. As Ray Dalio explains, the economy is a complex interplay of human interactions, which ultimately determine the value of assets.
Appreciation vs. Depreciation
Before we explore further, let's define our terms. Appreciation refers to an asset's increase in value over time, while depreciation is the opposite—where the value decreases.
Not all assets behave the same way. While items like cars and electronics typically depreciate, investments like real estate and stocks are expected to appreciate. This expectation is influenced by an asset's useful life; for instance, real estate has a long lifespan, often spanning decades.
Real Estate Appreciation
Consider this: if you buy a house for $120,000 and it appreciates by 5% in a year, its value increases to $126,000. The key to maximizing returns is leveraging investments. For example, with a $25,000 down payment, you see an increase in the property's overall value—not just your initial investment.
Various factors drive real estate appreciation, including land value, location, economic conditions, and interest rates. Additionally, investors can boost property value through repairs and improvements, known as forced appreciation.
Real Estate Depreciation
Real estate depreciation means a property's value decreases over time. However, savvy investors can use this to their advantage by reducing their tax burden. Depreciation allows you to deduct the cost of acquiring an income-generating property over many years, resulting in lower taxable inco me.
Key facts about real estate depreciation include:
Only the building, not the land, depreciates.
Depreciation follows IRS standards: 27.5 years for residential and 39 years for commercial properties.
You need a qualified CPA to calculate your after-tax investment returns.
To apply for depreciation, the property must be owned by you, used for rental income, and have a useful life of over a year.
In summary, passive real estate investment generates income taxed at a lower rate than active income. And as properties age, owners can depreciate not just the building but also its contents, leading to significant tax benefits.
Unlocking Real Estate's Potential
Real estate offers regular income through rent, potential profits from appreciation, and tax benefits from depreciation. That's why it's a superior investment vehicle. With Resilience Equity, you can tap into this lucrative strategy stress-free.
Our goal is to simplify apartment community investment for you, providing passive income to fulfill your dreams. Schedule a call with one of our advisors to start your real estate journey today.
