Often when people think of depreciation, it has a negative connotation: Buy a vehicle, drive it off the lot and it nearly instantly depreciates. Try selling it a short time later, and the resale price likely is less than what it was bought for and less than what might be owed on a car loan.

But while that sort of depreciation can be viewed as a loss, or a negative, the tax and accounting rules related to the allocation of depreciation for property can be a benefit in certain circumstances. 

As an asset, the right real estate investment may increase over time.  The value of the land involved, for instance, may go up in certain markets. An apartment building with good occupancy and good rental rates, for example, has the potential to sell or refinance for more than the cost to build or buy it.

But along the way, while an owner builds equity in the building and the actual value that would be realized in a sale or refinance might increase, the tax rules allow the owner of tangible personal property (e.g., buildings, furniture, equipment, etc., but not land) to depreciate certain costs of the property. The tax rules are based on the concept that everything from the roof to the appliances to the bathroom fixtures will wear out over time.

That depreciation may become a tax deduction when tax time arrives. So, real estate investors in an entity that has elected pass through taxation can benefit from an investment in an asset that may increase in value over the long-term, distribute income from rental activities, and at the same time, receive an allocation of depreciation of the investment’s property, which an investor may be able to use a deduction.

The combination of potential long-term asset growth, projected income and possible tax benefits is a strategy sought-after by many savvy investors.

Of course, not all real estate investment opportunities are equal. While tax rules permit the depreciation of certain costs, it is important that the property is well maintained and managed to achieve projected revenue and value. That is why it is still important to invest with a real estate partner with a record of portfolio growth and high-quality asset management. Real estate built and maintained in neighborhoods with favorable demographics, managed by professionals with first-class customer service, tends to perform well for investors regardless of other market conditions.

The Redwood Equity Program is now offering an increased allocation of depreciation to qualifying investors. Following extensive analysis, a modified operating agreement will be used for future Redwood projects, starting with Redwood Holt Phase III.  The modified operating agreement provides for a greater allocation of any depreciation on the project cost to the investors than was allocated on prior Redwood investments.

The increased allocation of depreciation will only impact future Redwood projects.

Redwood’s solid track record as a developer, builder and manager of remarkable single-story apartment homes has produced strong participation in the Redwood Equity Program. Its emphasis on site selection, intentional design and resident retention makes Redwood Neighborhoods an outstanding addition to investment portfolios. And now, qualifying investors will enjoy a great benefit – an increased allocation of potential depreciation – adding one more significant reason to consider a Redwood investment.

To learn more about investing with Redwood, call 216.360.9441 or fill out a contact form.