“Trumpeting EBITDA is a particularly pernicious practice,” notes Warren Buffet, boss of Berkshire Hathaway. “Doing so implies that depreciation is not truly an expense, given that it is a ‘non-cash’ charge. That’s nonsense.”
Moreover, depreciation charges often result in lower reported earnings and real estate values. Because the depreciation charge is deducted from revenue, lower earnings are reported. And because real estate value, as carried on the books, are inversely related to the accrued depreciation account, real estate values decline as well.
There are opposing schools of thought on the benefits of hefty depreciation charges. On one hand, lowering taxable earnings results in lower taxes payable each year, which is viewed favorably by some. On the other hand, the decline in real estate value translates to higher capital gains taxes when the real estate property is later sold. But there is an agreement on one matter.
A lesser amount of dividends are distributed to the real estate investors because of dear depreciation charges. The table below shows the difference between reported earnings and available earnings. The difference in earnings reported is a result of lower capital expenditure expense compared to the depreciation charge. An illustration for a capital expenditure is the replacement of a roof or an elevator.