Investing in long term assets is usually fruitful. From stocks, bonds, copyrights, patents to real estate all give good profit after a long period of time. However there is something called as depreciation that might eat into your envisioned profits. Therefore it’s wise to know more about depreciation.
The first question that comes to mind is what exactly depreciation is. Depreciation in accounting can mean two things – decrease in value of assets and allocation of the costs of a long term asset to an expense over the useful life of the asset.
The next query is which assets can be depreciated and which cannot. Assets such as buildings, equipment, machinery, computers, vehicles, furniture and fixtures among others can be depreciated. So antiques though quite expensive and a good investment do depreciate over time due to wear and tear. Non tangible assets too such as patents, copyrights and computer software too can be depreciated.
There are certain assets that do not depreciate and hence are quite profitable. Land is not a depreciable asset as it does not lose its value. Like land, gold too does not depreciate because it is believed to have an unlimited time span. But sometimes gold does depreciate due to the changes in the market. During recession the value of gold increases but when the market revives the demand for gold declines. Gold ornaments on the other hand depreciate quicker than pure gold because ornaments can be damaged, simple wear and tear can reduce the value of gold.
Properties that you use both personally and professionally can only be depreciated from the business perspective. Rented properties too undergo depreciation. Depreciation expense is the largest tax deduction available to real estate investors and can help investors improve their cash flow by reducing their tax liabilities. Every year you can reduce your taxable income without negatively impacting your cash flow.