I wanted to clarify how rental income taxes are calculated, so that I can see how much I owe to uncle Sam and how much after tax cash flow I make. From what I understood, the rental income tax is calculated by using the following method: Taxable Income = Gross Rental Income - {Operating Expenses + Mortgage Interest + Depreciation}.
I believe that things like utility (unless it is paid by the tenants), repair & maintenance, property taxes, insurances, advertising and leasing fees are included in the Operating Expenses. Is Capex (Capital Expenditures) included in the Operating Expenses or no? Capex is a big expense, so it would alter the tax calculation greatly.
Hi @Choi Chingis, You've got the basic formula right. Operating expenses are the ongoing costs of running the rental, and those are deductible in the year you pay them. CapEx is different. Big improvements like roofs or HVAC systems aren't treated as operating expenses and can't be deducted upfront. Instead, they get added to your basis and recovered slowly through depreciation.
So your taxable income formula stays the same, and CapEx affects your taxes indirectly over time rather than reducing your taxable income in the year you spend the money.