Depreciation helps the average taxpayer match his cash flow from a rental property to his taxable income. Most real estate investments are financed. The law doesn't allow a deduction for the principal portion of a mortgage payment only the interest. Depreciation is a paper deduction that helps lower the investors income so that on average the income reported for income taxes will be the same amount of income generated by the rental property over the life of the property.
“Depreciation helps the average taxpayer match his cash flow from a rental property to his taxable income. Most real estate investments are financed. The law doesn’t allow a deduction for the principal portion of a mortgage payment only the interest. Depreciation is a paper deduction that helps lower the investors income so that on average the income reported for income taxes will be the same amount of income generated by the rental property over the life of the property.”
Yes, I know what it does. I used it when I owned rental income property.
But, unlike depreciation for things that actually do depreciate, like machinery for instance, the “tax savings” from that depreciation is a consequence and it is allowed because actual depreciation does occur. But “depreciation” of real estate is not someting that naturally occurs, minus poor maintenance or a major down tutn in a real estate market. Applying depreciation for real estate, for tax purposes, is not derived, unlike machinery, because any actual real depreciation of value can be assumed - it is PURELY a provision for tax avoidance, which is not a mere consequence, but apparently its only purpose.
I do not know the history of when real estate depreciation obtained its role in the tax code, but unlike most other allowed depreciation it is not rooted in an actual expected value depreciation.
But like I said, I am for a flat tax to begin with and with zero deductions, exemptions, exclusions or credits - just everyone paying a simple low flat tax.