Writing off Depreciation Expense

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I read somewhere that you can write off on your taxes a certain portion of your income if the property is younger than 27.5 years (or something to that tune). I recall there being something about a 10K threshold. 

Maybe I am misinterpreting the Tax rule here, but does it essentially mean (on newer properties) your first 10K is essentially tax free?

Am not an accountant, so please don't rely on this advice. 

That said: You can write off 1/27.5 of the value of the structure (but not the land!) against your income each year (until you've owned the property for 27.5 years).

So, if you bought the property for $1MM and the land is worth $500k and the structure is worth $500k, you can depreciate 500,000/27.5 =~ $18,200 per year.

That means that first $18,200 is tax free.

Residential property can be depreciated over 27.5 years. Commercial property is 39 years. These can be paper losses rather than cash out of pocket expenses. When you sell, unless you 1031, you have to recapture the depreciation. Find a good CPA if you start investing.

When you buy a big business asset it wears out over time. The tax code allows you to take this "wearing out" as an expense over a specific period of time. Homes actually tend to appreciate vs depreciate so it becomes a huge tax advantage for real estate investors. Careful depreciation is not tax free, it just defers tax. You have to recapture the depreciation expense you take when you sell the property.

Estimate the value of the house (not land), this is your tax basis.  The fraction 1/27.5 works out to 3.64% of the value of the house.  This is why people who want to pay off a hand full of properties will pay higher taxes than someone making the same cash flow on more properties because this "paper loss" of depreciation is limited per property. Insert disclaimers here.