Tax Shield

A tax shield is the reduction in income tax that results from a deductible expense, equal to the deduction times the tax rate. For rental property, the main shields are depreciation and mortgage interest. Neither one touches NOI, but both change what the owner keeps after tax.

The default house generates about $14,545 of depreciation a year. For an owner in a hypothetical 24% bracket who can use the deduction, that shields about $3,490 of tax. Interest on the loan adds a second shield on top.

Because the shield depends on the owner, it belongs in an investor's after-tax return and not in the property's value. A buyer pays for NOI through the cap rate. The tax shield is a benefit that varies with each buyer's bracket and situation.