Return of an investor’s investment is provided for through:
Question & Answer
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sinking funds.
Sinking funds are established to set aside money periodically for future debt repayment or specific future expenses. They don't directly provide return of investment to the owner but rather ensure funds are available for future obligations.
depreciation.
a reserve for replacement.
A reserve for replacement is an account set aside for future capital expenditures or replacement of components like roofs or HVAC systems. It's for future expenses, not for returning the initial investment to the owner.
profit.
Profit represents earnings beyond the return of investment, not the return itself. While profit is a goal of investing, it's not the mechanism by which the initial investment is returned to the investor.
Why is this correct?
Depreciation provides return of investment through tax deductions that recapture the investor's capital outlay. It allows investors to recover the cost of a property over its useful life through annual deductions on their tax returns, effectively returning a portion of their initial investment each year.
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