thanks Adrian I appreciate you so much .love to learn more about depreciation and amount ? Is is 3% if the building but not the land ? If so and for how long ( 30 years or till I meet the purchase price meaning the depreciation through your the years equal the building sale price that I've paid when I bought it ) assuming I'm not selling the property )???example of figures will help a lot thanks Adrian
section 8 is the name of a program that provides housing assistance vouchers to certain people who cannot afford rent on their income. It is a government program where HUD (housing and urban dev), pays the landlord a portion or all the rent.
Depreciation is tax related. Has nothing to do with section 8. If you but a rental property for 100k and the value of the land is 20K. You can depreciate the portion of the purchase price (80K) that is not land (value of the building). This is because the IRS assumes that when you use the building (as a rental) a portion of that building will get used up "consumed"; such that after some time you will have to repair / upgrade / rebuild.
Alright you want to talk depreciation that's my forte. Think of depreciation as a long term business expense taken as a tax deduction every year based on your property cost. Normal business expenses get deducted from your taxable income which lowers your tax liability because you incurred that expense for your business. When something has a "useful life" of over a year you generally can't deduct the entire expense in the first year, rather you have to spread the deductions across a number of years and we call that depreciation.
You have to depreciate rental property using the Modified Accelerated Cost Recovery System (MACRS) which is a set of tax rules for different asset classes. Residential rental property has an asset life of 27.5 years. Land is non-depreciable. Other asset classes include 3, 5, 7, 10, 15, 20, 25 and 39 year depreciable asset lives. You begin to depreciate when the property is placed in service and continue depreciating until it is fully depreciated or you sell it. You take your depreciation deduction every year on your taxes according to the depreciable cost basis and asset life within MACRS. When you sell the property you must pay depreciation recapture. This make sense since you got the depreciation deductions because you bought the property, you are no longer entitled to those deductions since you recoup your adjusted cost basis in the sale and no longer own the property. The nice thing about the recapture is that it tops out at 25%, so you generally have to pay back less than the tax benefits you received during ownership.
Here's a simple example: You buy a rental property for $120K and hold it for ten years then sell it. During this time you depreciate the property simply over the asset life as most people do and you have a 35% top marginal tax rate. Here's how the numbers look for depreciation.
Depreciation: $3,636.63/year, $36,363.63/10 year hold period (1/27.5=3.636% Depreciation per year)
Tax Benefit: $1,272.72/year, $12,727.27/ 10 year hold period (Depreciation times marginal tax rate - $3,6363.63 x 35% = $1,272.72)
Recapture: $9,090.90 upon sale of the property after 10 years. (Accumulated depreciation times recapture rate - $36,363.63 x 25% = $9,090.90)
I hope that helps. If you want to get into the nitty gritty of depreciation that improvement value is actually made up of building components, land improvements and tangible personal property. All of these assets have different class lives and there can be differences in classification based on how the asset is intended to be used. That $100,000 cost basis could be further broken down into maybe $15,000 in tangible personal property and $10,000 land improvements and $75,000 building components. Then you're depreciating $75,000 over 27.5 years, $10,000 over 15 years and $15,000 over 5 years. That's where it gets complicated because some things can be allocated to shorter lives or longer lives based on their use and the tax benefits start really adding up. To go into this much detail you need to have a cost segregation study done on the property. Cost segregation studies identify assets for accelerated depreciation and correct the depreciation according to MACRS.
Please feel free to PM me if you have questions about cost segregation studies and correcting depreciation.