What does depreciation mean in tax terms for investment property?

What does depreciation mean in tax terms for investment property?

• A. A cash expense.
• B. A deduction for mortgage interest only.
• C. An increase in property value deduction.
• D. Non-cash expense deduction that reduces taxable income over time.

Answer: (D)

Depreciation in tax terms is a non-cash deduction that lets you recover the cost of the building portion of an investment property over its useful life, reducing taxable income each year. You divide the property's cost between land (which isn’t depreciated) and the structure (which is). For residential rental property, the IRS uses a standard recovery period (about 27.5 years), and you deduct that annual amount from your rental income to lower your taxes, improving cash flow without any actual cash outlay in that year. It’s not a reflection of rising property value; it’s a tax allowance for wear and tear over time. When you eventually sell the property, depreciation can be subject to recapture, which may affect taxes on the sale.

Depreciation in tax terms is a non-cash deduction that lets you recover the cost of the building portion of an investment property over its useful life, reducing taxable income each year. You divide the property's cost between land (which isn’t depreciated) and the structure (which is). For residential rental property, the IRS uses a standard recovery period (about 27.5 years), and you deduct that annual amount from your rental income to lower your taxes, improving cash flow without any actual cash outlay in that year. It’s not a reflection of rising property value; it’s a tax allowance for wear and tear over time. When you eventually sell the property, depreciation can be subject to recapture, which may affect taxes on the sale.