Unexpected Paper Profit Tax Liability

[Hudson Doyle]

I bought a 2 family the end of 2012 and have now completed my first year as a landlord. My accountant recently provided me with my Schedule E tax return for 2013 and I was surprised to see that my taxable income is far greater than my actual profit. I gather this discrepancy is chiefly due to the principle payments on my mortgage. That is, the rental income minus expenses, depreciation, mortgage interest, etc. (but not minus mortgage principle payments) leaves a larger income than I actually took in as profit. This was a surprise to me, as I thought REI generallly helps reduce your tax exposure, but somehow this discrepancy didn't occur to me. And it appears to me I will be paying taxes on money I did not in fact take in.

Am I missing something or is this often the case?

[Steve Babiak]

Originally posted by @Hudson Doyle:

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land/improvement value is taken from the town assessor database. i wish it was different--i.e. for depreciation expense.

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@Steven Hamilton II

@Steven Hamilton II or @Dave Toelkes might have better input than mine, but I believe the RATIO of land assessment to total assessed value should be multiplied by your purchase price to get your land value that then gets subtracted from the purchase price to get the value of the structure for depreciation purposes.