When you invest in real estate, you can probably write off something called depreciation as an expense on your federal income taxes. Depreciation represents the value that your building loses throughout the year due to physical wear and tear. Residential income property is depreciated over a period of 27.5 years, while commercial income properties are depreciated over 39 years, both using a straight line depreciation. This means that your asset is depreciated by an equal amount every year.
Remember, depreciation only applies to the buildings on your property, and not the land itself. Empty land is not considered to deteriorate over time.
Meanwhile, any income you garner in the form of rent is considered “passive income”. This means that it does not get calculated into your self-employment income. Investing in rental real estate can therefore do a lot to relieve your tax burden.