State Specific Question About: ILLINOIS (IL)

I have a property for rent. When I run my annual numbers my EBITDA is $6060. My Depreciation expense based on the property purchase price of $250k divided by 27.5 years yields ($9054). After I subtract this from the EBITDA of $6060 I have a taxable income of ($2993). My tax rate is 30% which give me a tax burden of $0. If I add the Depreciation back in I have a Net Income of $6061.

1. Did you segregate the land cost from building cost?

Henry,

Depreciation is one of my FAVORITE real estate topics~

Yes, you're doing this correctly. It's one of the BEAUTIFUL things about real estate. You can show a PAPER loss, even while putting actual CASH into your pocket. That additional ($2993) can be used to offset other income, from a W-2 job for example.

My first 4 years in real estate my effective tax rate was NEGATIVE. That's right: I literally received money that had never been withheld from my W-2 check. Uncle Sam picked the pockets of wealthier people and redistributed it to poor little me. Welcome to the "fairness" our benevolent leaders give us! Hey, all I did was file my taxes as the law says. Don't like it? Vote those goofs out of office! Anyway, political tax rant complete.

Today, things have changed a bit. Rents have gone up, so I'm actually MAKING more now and paying my "fair share" of taxes, though most of that income is still shielded vs. depreciation of the structure itself.

So to answer your question, you can keep "doing this" until you die or until you run out of depreciation in 27.5 years, which ever comes first. It is all 100% legal, above the board, moral, ethical, etc.

Here's the other fun part: if you fully depreciate this property and sell it for $1 million, you will pay taxes on the full sale price. The recapture rate is 25% of the amount depreciated (i.e. $250,000), then you'll pay the long-term capital gain rate of 15%. This assumes you have fully depreciated any additional capital improvements done to the property as well.

HOWEVER, if instead of selling it or transferring the title to someone else before you die, you instead leave it to your heirs in your Will and THEY sell it within 6 months of your death, they will inherit the property on a "stepped up basis" of $1 million. They will pay ZERO, ZIP, EL-ZILCHO in taxes on even $1 of the sale proceeds. The depreciation you used to shield your income disappears, never to be heard from again. So if you want to leave a large amount of wealth to your heirs, this is the way to do it!

If your heirs instead decide to keep the property and rent it out, they can do the same thing (i.e. depreciate it to $0 to offset the rental income), then leave it to their heirs...the value steps up AGAIN! Under current tax law, you can do this forever, essentially creating generational wealth and safeguarding huge amounts of income from taxes.

You can "get away" with this for 27.5 years. or till you sell it and then the govt will want their money back. Or do a 1031 exchange into something bigger.

I did a deal like yours last year and we are not going to pay taxes for a long time.

The govt wants to compensate you for some of the risk you are taking by having real property. Now that they have their hooks in you, they will recoup it other ways. property taxes, water, sewer, fines, permits and other fun ways.