Depreciation is a difficult issue in its computation of the cost of real estate companies.
Accountants do not try to correct their financial statements, and you need a basic principle of the universe, which recognize troubled philosophers for thousands of years. As George Harrison sang years ago, "All Things Must Pass."
There is nothing permanent in this world in three dimensions of space, time, matter and energy. Like anyBuddhist.
N. Construction will continue forever. Even the pyramids in Egypt eventually undermine the dust.
Therefore the owners are entitled to their their gross income to deduct as depreciation, on the theory that every year, the building a little "worn by abrasion of the universe. What physicists call entropy, according to the third law of thermodynamics.
This impairment is often, by calculating the total costBuilding for the number of years, is expected to have a useful life.
If you pay one million U.S. dollars for a building, and it is expected that in the past 10 years, a straight-line depreciation of $ 100,000 per year.
Note that U.S. $ 100,000 not in cash, actually pay out of pocket. Amortization simply reflects the reality that sooner or later, this building is not useful, and thus the 1000000 dollars has been paid you off.
Although it is not practical, it would be ideal,You pay someone $ 100,000 per year for ten years to build a new building parts.
And if the depreciation that is deducted from the base cost of the building. So, after 10 years in the example above, this building is officially worth nothing, although it may still be in an ideal state in an affluent neighborhood. If she cared for properly and in good condition, can be useful for an indefinite period.
So one of the major problems is the determination of theLife expectancy of an office building.
Of course, when it comes to shopping, we assume that their function is to lease a space for shops and restaurants, not to act as tourist attractions. So we can rule out multi-span thousands of years, including the Colosseum and the ruins of Angkor Wat represent - that the tourists for money to win, even if they are successful.
But even if it drops to the level of construction and banalShopping centers, but do not know with certainty how long it takes. Of course there are castles in Europe are living hundreds of years - but also houses of stone farmhouse, where farming families still.
It is therefore quite possible that were prepared to buy a building in a nice neighborhood, or who have taken the burden of depreciation on them. . . and after 20 or 30 years are now worth much more than originally paid.
In a way, in the long run, reflects the amortization something real, but it is difficultexactly know how much effort to be made each year - without a crystal ball.
For example, New York is the Empire State Building nearly 80 years, but millions of euros would be different if sold. The useful life of the World Trade Center was stopped prematurely in a way that could not be predicted.
Thus, if a Real Estate Investment Trust calculates its net profit, you must apply generally accepted accounting principles. He determines the gross income, then subtract theOperating expenses, then subtract a number that represents the depreciation of the buildings they have - even if they have, in fact, a value obtained.
Suppose XYZ REIT had gross revenues of $ 1,000,000 and expenditures in the amount of 700,000 U.S. dollars. This is $ 300,000. While keeping 100,000 U.S. dollars for the depreciation. This leaves $ 200,000 that its operating revenues.
The law requires them to pay at least 90% of these assets to shareholders as a dividend. Thenmail must to 200,000 X $ 90 = $ 180,000 for investors.
But wait - the cost of depreciation of U.S. $ 100,000 is an entry for "book" only. In other words, it is only on paper.
The $ 700,000 in operational costs amount to money that the REIT account has left to pay salaries, repairs and other necessary expenses.
Depreciation is not a cash payment to third parties. The $ 100,000 is still sitting in their bank account.
So pay, why not to the shareholdersmuch?
The $ 180,000 plus $ 100,000 = 280,000 $ A provision for dividends for shareholders, they would be even happier.
Why not? This is to pay what many of these companies - from dividends, rather than the law requires.
And you get some payments of dividends, which may represent the depreciation of the stockholders, it even happier than usual. Why.
The control rate on dividends, which it is real estate investment trusts, which represents the impairmentNot immediately taxable to the shareholders.
Why is the money that is available because the company's costs in the amount of depreciation to the IRS officially a "return of capital," no income.
A return of capital is not passive, because it is not income. But it reduces the cost basis of your shares of REITs.
What is the time when you care about the cost basis of your shares?
If you sell them.
If you do not sell. . . notCare ever.
Suppose you have 100 shares of XYZ REIT for $ 10 each. Your cost basis is $ 1,000.
In the first year return on a dollar for each share, 25 cents per share, the depreciation. This means that the cost is reduced from, 25 x 100 = $ 25.00.
So your cost basis of these 100 shares is now $ 975 instead of $ 1000
You have to pay taxes on dividends, but only $ 75, not the total amount of 100
If next year you will decide to sell the shares at $ 11each, you get a total of $ 1100 You have capital gains tax on $ 125 instead of $ 100.
In fact, now pay taxes, 25 cents per share dividend from the depreciation of checks that the past year.
But to say that you are smarter than that. Do you sell your shares of XYZ. Dividends, as long as you continue to live, to obtain.
If you do not pay taxes on the deposition? Ever.
The impact of this little-known orunderstood. Even the well-known book writer REITs, Ralph L. Block does not mention in his book, "Investing in REITs until the first plant.
The control rate of dividend represents a return of capital because of depreciation differs from company to company, and of course, vary over time. Historically, runs 25% to 30%.
The bottom line is for the shareholders of the estate of the confidence that - well, they never sell their shares - their effectiveness, the net return after taxthan they think. The exact amount depends on the marginal tax rates.
Say the above example is the marginal tax rate of 35%.
Enter the ordinary income of 35 x $ 75 = $ 26.25.
You will receive $ 100 and paid $ 26.25 in taxes, so that a net after-tax $ 73.75.
Your network is after tax on your shares 7.375%.
If there is to pay an ordinary dividend in any commercial enterprise outside the property, you have to pay taxes on $ 100 in allDividends, for a total amount of tax due of $ 35. For a net-65 U.S. dollars. A network of after-tax of 6.5%.
So is the true net after tax returns of a REIT to be calculated, it is necessary to multiply the benefits of (one plus the removal of X given marginal tax rate) to.
Thus in the example above, the yield 10%, apparently. (One dollar in dividends for ten dollars) in the camp.
, 10 X (1 + ((.25 X .35)) =
, 10 x 1.0875 = 10.875% net after tax
Purists sayYou need is the cost method again, but my argument is that it does not matter as long as you never sell the shares. In this case, your "practice" approach that costs reimbursed.
So do not sell forever.
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