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How Does Depreciation Work?


One of the biggest advantages to investing in real estate are the tax benefits. Because the IRS allows the cost of income-producing property to be recovered through yearly tax deductions, in many cases it’s entirely possible to create a monthly cash flow without paying any tax on it.

How is this possible? A big part of the equation is depreciation, a non-cash – or paper – deduction that allows you to spread out the cost of buying a property over decades.

“Real estate is one of the only assets where you can depreciate or write off some of the wear and tear and usage of the property and shelter some of the income while still having the benefit of appreciation over time,” said Jason Kjellson, Executive Vice President, Versity Invest.

Depreciation schedules

The IRS assigns different depreciation schedules to different assets. A retail or office building, for example, is said to depreciate over 39 years, while a residential rental property is depreciated over 27.5 years.

“With student housing properties, the IRS gives a very favorable depreciation schedule so that a lot of folks who own triple-net leases or retail properties or office properties, they’re not used to having such strong depreciation,” Kjellson said. “Typically, those will shelter 40 percent to 50 percent of the income. For student housing, the depreciation schedule alone allows you to shield 60 percent to 70 percent of the income.”

Land value vs. building value

You can depreciate only the cost of the land, not the cost of the building. “So whenever you buy a property,” Kjellson says, “you have to figure out how much of the value of the investment is attributed to the land and how much is attributed to the building.”

Part of the strategy is to seek out properties in smaller metro areas like Eugene, Ore., or Provo, Utah, or South Bend, Ind.

“In these tertiary markets, the land value is minimal,” Kjellson explains. “So if you’re buying a property in South Bend, Indiana, for example, typically 90 percent to 95 percent of your investment is depreciable. It’s in the building itself; whereas a lot of folks who own property in California or New York, 40 percent to 50 percent of their investment might be tied to the land as it’s not depreciable.”


The third element is leverage, which refers to the ratio of debt to equity.

“By having a little bit higher leverage, it means that you’re buying a little more of the building, which we can then depreciate and shelter more income from,” Kjellson says.

Companies typically takes out a loan that is roughly 50 percent to 60 percent of the property’s value, which protects investors from liability while providing the benefits of ownership.

The bottom line

“These three things taken in total are what makes the company so strong on tax shelter. Where else can you find an investment where you can have a 6½ to 7 percent income and in many cases not pay a dime of that to Uncle Sam? It’s 100 percent tax sheltered. We think it’s phenomenal and really unique to our business model.”

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The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by an issuer, or any affiliate, or partner thereof (“Issuer”). All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM. With respect to any “targeted” goals and performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. These “targeted” factors are based upon reasonable assumptions more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment. These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified. Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.

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Real Estate Risk Disclosure:
  • There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
  • Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
  • Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
  • Potential for foreclosure – All financed real estate investments have potential for foreclosure;
  • Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. Private Placements are Speculative.
  • There is no secondary market for these investments;
  • Private placements carry a high degree of risk
  • Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
  • Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits;
  • Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.

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