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Rental Property Depreciation

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Rental Property Depreciation and How to Understand It. What is rental property depreciation? It’s defined as a reduction in the value of an asset over time. In this video, I’m explaining why depreciation is one of the most powerful benefits of real estate investing. Depreciation is important because it helps you keep more money in your pocket, instead of sending it off to the federal government at tax time. Depreciation is a fantastic way to mitigate your overall tax burden, so you’ll want to know exactly how it works. This video contains a specific example of how to calculate depreciation, and how it works inside the current tax code. I’ll also discuss a way to elevate your depreciation strategy, and discuss how raw land ties into this topic. VIDEOS ABOUT GETTING STARTED IN REAL ESTATE https://www.youtube.com/playlist?list=PLZdhTWJ6Yawp1LPllyyeQho_ouMhrbOy6 VIDEOS ABOUT REAL ESTATE NEWS https://www.youtube.com/playlist?list=PLZdhTWJ6Yawp7aUQgMPmAanHSYgP-UI0i SUBSCRIBE AND JOIN OUR AWESOME COMMUNITY: https://www.youtube.com/c/MorrisInvest
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Text Comments (54)
Israel Alvarado (2 days ago)
Exxxxxxxxxxxcellent!!!!
Morris Invest (2 days ago)
Thanks for watching!
dreby2231 (10 days ago)
u kick butt
ASK AUSTIN HARLEY (26 days ago)
Awesome Video! Definitely Subscribed. Can you make a video about Depreciation Recapture. I am not finding much info on this. TIA!
Morris Invest (26 days ago)
We will add it to our list of topics! Thanks for the suggestion, Austin!
Keith P (27 days ago)
First I would like to say that I love your videos. They are very very informative and I've gotten a lot out of them. I just sold a rental property and contacted a CPA that's new to me. I explained that I needed to use them because of a special service they provide plus I needed regular tax filing. I explained that I just sold a rental property and she mentioned "depreciation recapture". She said that the depreciation that was written off during the time of the ownership of the property will have to be repaid. Have you heard of this before? Thank for your time and keep up the good work
Morris Invest (26 days ago)
Yes, that's true! We'll try to make a video on this subject soon.
Jimmy Huynh (1 month ago)
In your 50K example, isnt the land part of that amount? How would you calculate and subtract the land amount out? Thanks
Titania Evil (1 month ago)
WHAT RACE are you or ethnicity ?
Anthony B (2 months ago)
good stuff man!!!
Morris Invest (2 months ago)
Thanks for watching, Anthony!
Cheri Cherie (5 months ago)
Helpful and to the point
Morris Invest (5 months ago)
Thanks, glad you liked it!
magic cheeseball (7 months ago)
never goes to 0? i guess you have never been to Detroit lol . if you have a dilapidated building on a property that cost more to remove than the property is worth, how much is that property worth? less than 0 .
Sanjay Patel (8 months ago)
Depreciation is not as beneficial as everyone on youtube is touting. Once you factor in the depreciation recapture at sale, you essentially pay back in taxes all that you saved over the time you owned the house. No one ever talks about this.
Shane Peterson (24 days ago)
Invest for rental cash flow and don’t plan on selling.
CaliBoy Rumbles (1 month ago)
What is depreciation recapture?
Pfsif (1 month ago)
Doing that now :(
Gumbo Jambalaya (8 months ago)
Wow, you made it so simple
Morris Invest (8 months ago)
Glad to hear that!
Tony Jhang (9 months ago)
For rental property cost segregation at reasonable price, please contact me. I know a company who does cost segregation using software for rental properties which do not involve engineers coming into the properties and assess ,etc.
omachkar (9 months ago)
Do you have to pay back to the IRS all the depreciation you took when you sell the property?
Fn Ln (5 months ago)
Yes, it’s called depreciation recapture. It’s a lot more complicated than it appears on the surface.
cello415 (9 months ago)
ive been using depreciation on both of my properties...could you make a video explain what is depreciation recapture. from what ive been reading this is the payback of the depreciation of the property over the years you claimed it. the rate of depreciation recapture is %25 on the profits on the sale of the home.
Fn Ln (5 months ago)
Search YouTube there are plenty of video talking about depreciation recapture.
Morris Invest (9 months ago)
Thanks for the question, we'll add this to our list of topics to cover!
Alan Vallance (9 months ago)
Great video! Clear and concise.
Morris Invest (9 months ago)
Thanks, Alan!
Anibal Martinez (9 months ago)
Hi morris why don't we just not report depreciation so we you sell the income property don't have to pay capital gain and taxes due to the fact that the building was depreciated for years. please Advice Thanks.
Morris Invest (9 months ago)
Our accountants claim that depreciation is one of the most powerful tax strategies available to real estate investors, so we follow their advice. Feel free to seek the counsel of your own CPA.
C Mo (10 months ago)
Awesome video Clayton. Thank You so much. Questions regarding (Depreciation). How does one determine the Price of the Property ÷ 27.5 Years? Do you go by (Initial Purchase Price of the Property) or (By Each Year Appraised Value)??? Please advise. Thank You.
Morris Invest (10 months ago)
Hello! Depreciation is calculated by the value of the home.
elias palacios (1 year ago)
Depreciation restarts each time the house is renovated or sold? thanks
scott banta (10 months ago)
so if I own the house for more than 27.5 years the depreciation benefits stop at that 27.5 year mark? and if so how would you track such a long period of time knowing that tax documents can be shredded after 7 years? also is it from time of ownership or from time of claiming depreciation? say I've owned a home for 5 years but this is my first year claiming depreciation. is it 27.5 years from the time i bought it or 27.5 years from the first time I claimed depreciation?
Morris Invest (1 year ago)
+elias palacios For 27.5 years after the house is ready for business use.
discflickerDotcom (1 year ago)
Way back in 2002, my mom bought a Michigan condo for $165,000 and then suddenly died, leaving it to my brother and I as T.O.D. We tried selling it, but the market was bad, so then we started to rent it in late 2004, and my brother also died around the same time. I tried to sell it numerous times, but the market never came back until recently. I finally sold it last year for $135,000, and so I assumed that I wouldn't owe anything on it, in fact, I would have taken a $30,000 loss. HOWEVER, my accountant shocked me with a last-minute total bill of about $28,000 to the IRS, the state of Michigan, and for paybacks for Obamacare tax credits and penalties for exceeding my income threshold!! He told me that he had computed the depreciation payback USING THE ENTIRE COST OF THE CONDO AS THE BASIS ($165,000) and then assuming it was rented the entire time (it was not rented until late 2004), so he came up with 14 years * ($165,000) * 1/27.5 = $84,000 in depreciation that I owed!!! I learned how depreciation works overnight last Wednesday, 11-Oct-2017, then I went back and discovered that the annual depreciation that THEY have been accounting for over the years was only $5919, not the full $6000 that you get when dividing $165,000 by 27.5. Also, I discovered that this $5919 was not based upon a $165,000 cost, it was based upon a ratio of land to building, which came up to 12.2% off the $165,000, and there were also startup costs added into the equation. And also, we didn't even start taking depreciation on it until late 2004. When I called him back the following day and reported these numbers/dates, he recalculated it to now be around $1,600 (vs. $28,000)!!! These people are professionals, and they do this for a living. My obvious questions for you are: HOW CAN THEY HAVE COMPUTED MY TAXES SO SLOPPILY? HOW COULD THEY HAVE MADE THE CALCULATIONS ABOUT THE COST BASIS WITHOUT EVEN ASKING ME FOR ANYTHING TO SUPPORT THEIR ASSUMPTIONS? HAVE YOU EVER HEARD OF A COST BASIS BEING COMPUTED USING SUCH PRIMITIVE TECHNIQUES AS TO NOT TAKE THESE OTHER FACTORS (LAND PERCENTAGE, STARTUP COSTS, ACTUAL START DATE OF DEPRECIATION) INTO ACCOUNT??? I SMELL A BIG FAT RAT. I now believe that these guys were trying to pull a fast one on me... EVERY YEAR, they wait until the last day to finish my taxes, leaving me no time to even look at them to check for errors. They also have me fill out duplicate forms because they tell me that my identity may have been stolen, so one is for e-filing, and the other is in case the e-filing fails. I now think that they were going to either send the IRS a different set of forms or they were going to make an after-the-fact revision and then somehow intercept the refund, because it is not possible for them to have computed my taxes by such primitive techniques and reckless assumptions. Am I just being paranoid??
dannyboy9254 (8 months ago)
Did you kill your family? Tell the truth.
KidCity Lynnwood (11 months ago)
Wow, I don't think that you were being paranoid. I think they should be reported. Either way, if they were only being incompetent it's extremely excessive and should be looked into.
Morris Invest (1 year ago)
+discflickerDotcom Sorry to hear that happened to you. We are not accountants however. We love Provision, they're very knowledgable about real estate investing. provisionwealth.com
KENZHATE (1 year ago)
Does the cost segregation thing work for every state in the U.S? I own rental properties in California.
Morris Invest (1 year ago)
+KENZHATE Hi there, I don't own properties in CA, so I can't speak from experience. I believe that cost segregation is valid in every state, however please consult your accountant!
Love (1 year ago)
Wow. This is a great video.. Thanks so much im learning so much..
Morris Invest (1 year ago)
+Haniry Awesome, thank you! Glad to hear that.
Kumar Kumar (1 year ago)
does it matter how old the house is to reap the benefits of depreciation?
Kumar Kumar (1 year ago)
Thank you.i acquired a owner occupied 2 family home about a month ago it's a 2006 built home can I still reap the benefits of depreciation?
Morris Invest (1 year ago)
+Kumar Kumar No, deprecation has more to do with your money than the age of the house. You can claim depreciation for 27.5 years from when you invested.
Aaron Hartmann (1 year ago)
do you have your house appraised every year to adjust depreciation?
hunting282 (1 year ago)
Hi, I sold my rental last year and after watching your video I did not know this was possible. Can I depreciate my rental from passed years If I have never done this before?
Morris Invest (1 year ago)
+hunting282 I believe so, you can always correct a tax return. Reach out to a tax advisor to see if they can help!
Jeff Dimock (1 year ago)
Clayton, I'd be interested in your response to this article on BP (https://www.biggerpockets.com/renewsblog/2015/03/03/why-you-cant-make-money-on-30000-houses/) which uses the concept of depreciation's intent (as a tax "credit" for you to save for future real CapEx costs) to show why a $700/mo rent on an inexpensive house will never make money over time. Maybe you can comment on that analysis during your live YouTube event next week. Thanks!
Morris Invest (1 year ago)
Hi Jeff, thanks for your thoughtful comment! I actually just recorded a video on why I love $40k homes, it will be published soon. The bottom line is I invest for cash flow, not necessarily equity and definitely not for appreciation.
MikeeB28 (1 year ago)
Great explanation of depreciation, and I think I am going to find out how I can setup a call with your team.
MikeeB28 (1 year ago)
+Morris Invest Done
Morris Invest (1 year ago)
Thanks! Here's the link to book a call: https://claytonmorris.typeform.com/to/gjFne5

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