We opened my son’s 529 College Savings plan the week before he was born in January 1999.
When our son was in elementary school, I realized that that the traditional savings approach was not going to be sufficient and provide him with the financial freedom that I wanted him to experience.
In 2006, my wife and I started our real estate investment company to support our retirement, but also to leave a legacy and secure the financial future for our two children, Daryl and Shelby.
We established and named our Real Estate LLC after our two kids (DASHRE, LLC — — DAryl, SHelby, Real Estate) to constantly remind us of why we are doing what we’re doing in our spare time as well as budgeting our money to maximize our available investment funds to accelerate our childrens’ potential.
It’s why we always buy used cars and never have a car payment.
It’s why we keep our thermostat at 78 degrees to save on our utility bill.
To give us that extra $500/month to invest in our real estate business and have a greater impact and leave something for the next generation.
Building a real estate portfolio for passive income is not only great for you, but also has significant benefits for anyone that inherits your real estate portfolio.
For example, one big advantage most people don’t realize about inherited real estate, is it can be depreciated again!
Experienced real estate investors know that depreciation is one of the biggest tax saving advantages. A rental property can put cash in your pocket each month, but after depreciation and tax deductions, will put even more cash in your pocket.
As the saying goes, “it’s not what you make, but what you keep.”
If you have a long-term view of real estate investing, managing real property means maximizing your return now while building a nice nest egg for your children once they inherit your portfolio. The real property will not only build wealth in your lifetime by reducing your taxes, but continue to provide income and reduce taxes for your children upon inheriting the property. Real property depreciation is a big wealth building advantage not just for you, but also for your children.
What Is Depreciation and How Does this Work?
Depreciation allows your children to deduct the inherited property’s value over several years, but this depreciation is limited to physical structures, such as a home, multi-family property, or commercial office/retail building. According to the Internal Revenue Service, land does not wear out or become depleted, so you cannot deduct land value when depreciating the property. Depreciation does not allow you to gain money from the IRS, but it allows you to offset income generated by, or in association with, the property up to the total amount earned.
To be eligible for depreciation, you must own the property, which means the legal transfer of ownership must be completed after the death of the original owner. The property must also be associated with an income-generating activity, such as a rental property or property used in conjunction with your real estate business. According to the IRS, depreciation additionally requires the property to have a “determinable useful life” of more than one year, but this requirement is already met by the nature of it being real property.
The inherited property’s cost basis is the amount being depreciated over the useful life of the property. This value is estimated by the fair market value at the time of the decedent’s death, minus any estimated land value. As an example, if comparable properties were sold at that time for $500,000 and $100,000 of that is considered land value, the cost basis is $500,000 minus $100,000, or $400,000. You may also add legal, survey and recording fees to this sum when incurred during the ownership transfer.
What is Recovery Period?
The recovery period is the number of years over which the property is depreciated. This period depends on the property’s usage. For residential rental properties, the recovery period is 27.5 years.
How do you calculate depreciation
Dividing the cost basis by the recovery period will calculate the annual depreciation. So, in the previous example, $400k divided by 27.5 years is $14,545 in depreciation per year.
That means the rental property can produce $14,545 of income per year tax free for your children!
Whether you are building wealth today for your children to live a better life tomorrow or pass on your legacy to a passionate cause, real estate is a great vehicle to accomplish these goals. It’s not just about the appreciation of real property over time, but also the advantages of the tax savings that depreciation offers to your children, your passionate cause, or whomever you decide to inherit your real estate portfolio.
Happy investing and wealth building through real estate for not just you, but for the next generation so they can hopefully have a bigger impact than our generation!
Either way, Go Make a Difference!