Rental Tax Question - taxes on cash flow

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Rental Tax Question - taxes on cash flow

Walt B Philip
Member since 2020 · 22 posts · 20 votes

Just getting started with rental property investing and I'm wondering if the cash flow generated above and beyond all expenses (PITI etc) is taxable as income in NJ.

Numbers to illustrate the question: PITI is $3000/month and rent is $4000, so cash flow is $1000. Is that 1000 taxable?

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Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
5y

@Walt B Philip, I am not a NJ resident or investor, but yes and no.  You will take your 4k/mo, subtract interest, taxes and insurance.  Your principal is not deductible, so you are technically going to owe taxes on your principal repayment.

But you also will write off management fees (if you pay any), leasing commissions, repairs and maintenance. Some CAPEX will be able to be expensed, and some will be capitalized and depreciated over the useful life of that item. There is a chance that you could be showing taxable losses with positive cash flow, based on various accounting rules.

The moral of the story is: your cash flow is not directly correlated to your taxable income, and you will owe taxes at a federal, and likely state, level on your taxable income/losses.

Note: I am not a CPA or tax advisor.  I did my own taxes in turbo tax for many years, but when I started buying rental properties, I hired a CPA to make sure that I was doing things correctly.  I.e. I bought houses that needed a lot of work.  Everything you spend to make them rentable, but prior to having your first tenant, is capitalized.  Once you have your first tenant, a lot of that similar work can be expensed.

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  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    5y

    @Walt B Philip, I am not a NJ resident or investor, but yes and no.  You will take your 4k/mo, subtract interest, taxes and insurance.  Your principal is not deductible, so you are technically going to owe taxes on your principal repayment.

    But you also will write off management fees (if you pay any), leasing commissions, repairs and maintenance. Some CAPEX will be able to be expensed, and some will be capitalized and depreciated over the useful life of that item. There is a chance that you could be showing taxable losses with positive cash flow, based on various accounting rules.

    The moral of the story is: your cash flow is not directly correlated to your taxable income, and you will owe taxes at a federal, and likely state, level on your taxable income/losses.

    Note: I am not a CPA or tax advisor.  I did my own taxes in turbo tax for many years, but when I started buying rental properties, I hired a CPA to make sure that I was doing things correctly.  I.e. I bought houses that needed a lot of work.  Everything you spend to make them rentable, but prior to having your first tenant, is capitalized.  Once you have your first tenant, a lot of that similar work can be expensed.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Walt B Philip

    The difference between cash-flow and taxable income is

    Principal payments on a mortgage are not a tax deduction
    Depreciation is a non-cash expense that is allowed for tax purposes.

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  • Walt B Philip
    OP
    Member since 2020 · 22 posts · 20 votes
    5y

    Thanks guys but not following.  Let me ask it differently: is the rent that tenants pay to me taxable?

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    5y
    Originally posted by @Walt B Philip:

    Thanks guys but not following.  Let me ask it differently: is the rent that tenants pay to me taxable?

    I recommend you look up a Schedule E on the IRS website to get an understanding of what's deductible and what's not.  The two answers you've already received are accurate, so look at the Schedule E while re-reading those answers and then come back with additional questions if it still isn't clear.

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  • Dan MacDonald
    Residential Real Estate Agent · Arlington, VA · Member since 2013 · 32 posts · 3 votes
    5y

    @Evan Polaski @Basit Siddiqi

    Glad I found this thread. I have a similar question as the OP but in the context of a second home (not a straight investment property). My understanding is you cannot have taxable losses on a second home the way you can on an investment property. So in the example above, with $3k PITI and $4k income after rental expenses, and assuming you're in a 35% federal bracket and 5.75% state bracket, you're actually not covering the monthly cost of the property, correct?

    And in the case of a second home where you cannot rent it full time, you'll have those additional non-income producing days to bear as well. 

    Is your understanding that it would actually be fairly difficult to fully pay for the cost of a second home, when factoring in income taxes?

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