In our previous post, we illustrated the variations (on an extremely simplified level) between fees on wage income and on capital increases. Well, it can be done, and exactly how it is done is one reason our Real Estate market went haywire over the last decade. You see, you can convert common income into a capital gain, simply by investing in Real Estate. It all works through the magic of Depreciation even as we started to discuss in our last posting.
Depreciation confuses a lot of people as they tend to think it means something is depreciating, when in fact, it is appreciating usually. It is a word that identifies a tax concept just, as soon as you overcome that, it is simpler to understand. If you are helped because of it, just call it “D” and forget about trying to figure out what is Depreciating, because there is nothing. It is like attempting to understand Enthalpy and Entropy in Thermodynamics.
You’ll drive yourself nuts trying to visualize these terms as physical entities and flunk the course along the way probably. Once you accept them as labels for mathematical ideas (and memorize the equations for the exam!) you’ll pass the course. Our tax laws allow visitors to use Depreciation as a deduction on the taxes.
If you possess an investment property, you can (but aren’t forced to) Depreciate it every year, say by 10% of the Basis. Which means you can deduct that amount from your income. 100,000 for. You lease it out at a break-even point and it pays for itself. The mortgage is included in The rent, taxes, insurance, and upkeep. The tax laws let you deduct 10% of the value (I am utilizing a round number here, not the actual code amounts) of the house each year as a Depreciation Deduction. 10,000 from your income taxes. 5100. Not just a bad way to save money! But of course, THE GOVERNMENT is certain to get his taxes in the final end. When you go to sell the property, you pay taxes on the administrative center Gain.
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Sadly, the existing laxity shown by policymakers and political leaders with this front is costing us dearly in terms of lost industrial output and eroding competitiveness of our exports. For instance, as specified in the Industrial Policy 2010, the federal government has been struggling to implement ‘no-pay-for-no-work’ policy and one-window facility to all industrial woes.
Similarly, the same plan document promises easy leave from business for promoters, freeing them from long-term labor and other liabilities. Unfortunately, many of these also remain unrealized as is evidenced by the difficulty in exiting the market by the labor hit stricken Surya Nepal’s garment manufacturing unit in Biratnagar. The policy implementation paralysis is resulting in protracted commercial disputes, high cost of production caused by power slashes and high labor costs, and numerous supply-side impediments.