Definitions of concepts — today’s concept is depreciation. What is it? Who gets to use it against their job income, and who doesn’t?

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Transcript:   Everybody wants to hear what depreciation is, because they hear tax shelter is what it really means. Well, they’re right, it does. What it really is, is the recapturing of the aging of a property. That’s over-simplified terribly. But properties get old, and things age, and so they lose their value, at least in concept. So all depreciation is, is the tax code gives the investor a certain number of years. In residential investments it’s 27-1/2. It’s 39 for commercial. And there’s different kinds of depreciation. The depreciation covers cash flow from the investment first. If that cash flow wasn’t enough to take up all the depreciation that you had, any leftover goes to the investor’s income that he makes at the job. That’s called ordinary income. There you just learned another one. Now, here’s the problem. If you make $100,000 or less, you can take up to $25,000 a year in leftover depreciation that’s covered cash flow and was left over. You can’t use any more than that. But if you make over $100,000 a year, and up to $150,000, they begin taking that $25,000 away in a ratio from 1:150. So if you make $125,000, and you have $25,000 of depreciation left over after cash flow, they’ll only let you apply $12,500. If you make $150,000, you’re now barred from using depreciation against your ordinary income. It just goes on the shelf. We’ll talk about that later. There’s another kind of depreciation. The first kind of would be called more or less straight line. I say vanilla. It’s called cost segregation. All that is, in a nutshell, is instead of taking a 27-1/2 year for residential, 39 for commercial in terms of years, and it’s just the same amount each year for those number of years, and you can’t depreciate land, only the building. What they do is, they give a life to every component of the building. So air conditioning, heating, electrical, roofing, you get the idea. They all have lives. It’s usually going to be 5, 7, I think some are 10, very few, and then you have maybe 15 for foundation, things like that. But check the code. That’s how they do that. Now, what about long-term and short-term capital gain. Short-term capital gain is under a year, and that means you’re going to pay ordinary income tax rates, just like you had a second job. So if you flip a house, get everything done in 6 or 8 months, you make a profit, that’s your second job, big guy. You’re going to get taxed that way. Now, if you make an investment and your intent, not accidentally, your intent was for it to be long term, and you hold it over a year, and you sell it, the tax code says you’re going to pay capital gains taxes, which are usually far more attractive and lower than ordinary income tax rates. Today, I think that’s enough to chew. Don’t you think?