Module 20 — Real Estate Taxation

Topic 20.1: Understanding Depreciation: The "Phantom Expense"

Depreciation is one of the most significant tax benefits in real estate. The IRS allows you to deduct a portion of your property's value from your rental income each year, accounting for the "wear and tear" on the building. For residential property, the building (not the land) is depreciated over 27.5 years.

Example: For 4521 Primrose Lane, let's say the building is valued at $150,000. You can deduct $5,454 ($150,000 / 27.5) from your taxable income each year. This is a "phantom expense" because you don't actually spend this money. It can often reduce your taxable rental income to zero or even create a paper loss, sheltering your cash fl