The Secret Power of Depreciation and Amortization

Are you tired of overpaying your income taxes each year? What if we told you that the key to lowering your tax bill lies within two overlooked provisions of the tax code: depreciation and amortization? These powerful tax strategies can save real estate investors and businesses thousands of dollars each year, and the best part? Creating an LLC or other business entity can make it even easier to reap the benefits.

But what exactly are depreciation and amortization? Depreciation is the process of deducting the value of an asset, such as rental property, machinery, vehicles, and equipment. Amortization allows you to deduct a portion of an Intangible amortizing asset’s value over its useful life, such as loans, patents, and copyrights. Both depreciation and amortization play an essential role in the tax code and can significantly benefit investors and businesses by reducing their tax burden.

Let’s take a real-life example. Say you purchased a rental property for $200,000, and the government allows you to depreciate it over 27.5 years. This means you can deduct a portion of the property’s value from your annual taxable income. The amount you can deduct each year is $7,273, calculated by dividing the property’s value of $200,000 by 27.5 years. That’s 3.64% of the property’s value or $7,273 you can deduct from your TAXABLE income yearly. So, for example, if your taxable income is $50,000 (excluding the rental income), the depreciation deduction would lower your taxable income to $42,727 ($50,000 – $7,273).

Now, let’s say you also have a mortgage on the property with a balance of $150,000. As you make your mortgage payments, you can deduct the interest you pay each year, effectively reducing your taxable income even further.

But the real magic happens when you create an LLC or other business entity for your rental property. Not only does this provide liability protection, but it can also help you take advantage of even more tax deductions, such as those for business-related expenses.

Let’s do the math. If you are in the 25% tax bracket and take advantage of depreciation and mortgage interest deductions, you could save up to $15,000 in taxes each year. That’s an extra $15,000 in your pocket to invest in even more real estate or enjoy life’s pleasures.

Don’t miss out on these tax savings opportunities. Instead, take control of your finances and maximize your deductions with depreciation and amortization today. If you want to know more about how to take advantage of the tax code, get the book Tax-Free Wealth by Tom Wheelwright