Bad news: The government wants to take 50% of the profits from your building.
Good news: Some nice legislator long, long ago stuffed the concept of depreciation into the tax code, keeping the tax man from succeeding.
What’s “depreciation”? It’s a fake loss that allows you to use to reduce the amount of income you’re taxed on. Here’s how it works:
Example: Say you buy an apartment building for $500,000. Your accountant will divide that $500,000 between the value of the land and the value of physical structure that you’ve purchased. Say he divides it 50-50, $250,000 for the land and $250,000 for the structure.
As we all know, buildings age over time. To account for wear and tear, the government lets you take a paper loss each year equal to 1/27.5 of the value of the physical structure at the time of purchase. So your $250,000 structure depreciates by $250,000 / 27.5 = $9,091 each year.
That $9,091 sets off against your income. So, if, after paying your expenses, you have $10,000 in profit left over, the government would allow you to deduct $9,091 from the $10,000 and then only tax you on the remaining $909. So instead of paying 50% tax on $10,000 (which is $5,000), you pay 50% tax on $909 ($454.50) and keep the rest for yourself.
Note: I’m not an accountant and this is not tax advice. Don’t be cheap. Get yourself a good accountant who knows about real estate and do what he says.