Thanks to the generosity of the U.S. Congress, real estate allows you to take an annual tax deduction for the loss in value of your real estate. Ironically, while you are busily taking a tax deduction for the lost value, the actual worth of your property is going up. Real estate has taken a temporary hit in terms of value in many places in this country right now, but you get the depreciation credit even when real estate values increase (which is most of the time).
Capital Gains Taxation
Whenever you purchase something and its value rises while you own it, the federal tax code requires you to pay a special tax on that item when you sell it. Fortunately, no tax is due until you sell it. While there are a couple of steps involved, you can also extend the time you have to pay that tax in the event that you do sell it, which is a major benefit to all those who are able to capitalize on this little quirk of the tax code. Appreciation – Real estate appreciates – increases in value – far more frequently than it loses value. With these increases come the opportunity for you to add to your net worth. You’ll still have the monthly income your positive cash flow provides, so you have a second way to cash in on real estate. A third way is if you bought it at a great price. You could look at the trickle of monthly income as a down payment on the flood of cash that will come your way through appreciation – value you can benefit from by selling or by pulling equity out to help fund future purchases or use for anything you like.