Did you really make money on that rental?

Question

I know that sounds like a weird question.

But I’ve seen investors look at their bank account and think, “I made $40K this year.”

Then we look at the tax numbers… and it tells a very different story.

Cash flow and taxable income are not the same thing.

Do you track cash flow or taxable income more closely?

Curious what other investors are watching.

Rachel Mazzanti · Answer

Cash flow and taxable income are two different numbers. Mix them up and you'll think a rental lost money when it didn't, or the other way around. Three things bridge the gap:

1. Principal paydown. Not an expense. Cash left your pocket, but your net worth went up by the same amount.

2. Depreciation. A paper expense. It shelters income on your tax return, but no cash left your account.

3. CapEx. Cash left your account, but for tax purposes it's capitalized and depreciated, not expensed this year.

Run this once a year. Start with cash flow, adjust for those three, and you should land right on taxable income. If it doesn't tie, something's off in the books. In our experience it's usually commingled personal expenses or accounts that never got reconciled. Reconcile monthly and this takes 20 minutes a year instead of 20 hours at tax time.

Simon W. · Answer

I watch both, but I keep them as two separate numbers on purpose because they answer different questions.

Cash flow tells you whether the property can carry itself. Taxable income is what the IRS sees after depreciation, and it can be a lot lower than what hit your account. It can go the other way too. Principal payments leave your account every month but aren't an expense, so a property can feel tight on cash and still show a profit on paper.

The "I made $40K" bank number is usually the least reliable of the three, because it mixes in security deposits you owe back, reserves, and money you just haven't spent on the roof yet. What I like to see is a simple monthly P&L by property with the cash flow number next to it. When those two are far apart there's usually a good reason, and it's better to know what it is before tax time than after.

Did you really make money on that rental?

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