Does Mortgage Principal Count Toward Taxable Rental Income?

Question

Hi everyone,

I'm looking for some clarification on how rental income is taxed.

Scenario:

• Monthly rental income: $2,200
• Monthly mortgage payment (including escrow): $2,000


Principal: $1,000


Interest: $500


Property taxes: $300


Homeowners insurance: $200
• Principal: $1,000
• Interest: $500
• Property taxes: $300
• Homeowners insurance: $200

• Principal: $1,000
• Interest: $500
• Property taxes: $300
• Homeowners insurance: $200

So my monthly cash flow is +$200 ($2,200 rent − $2,000 mortgage payment).

My question is: What is considered my reportable rental income (before depreciation and any other deductions)?

Would it be:

• $2,400/year (the $200/month cash flow), or
• $14,400/year (the $1,200/month made up of principal + cash flow, since principal isn't deductible), or
• Something else entirely?

I'm trying to understand how principal payments affect taxable rental income. Thanks in advance!

Michael Plaks · Answer

Your reportable gross rental income is $14,400. But it is NOT your taxable net rental income. Your taxable net income will be $14,400 minus all deductible expenses which includes interest and depreciation but does NOT include principal payments.

For a better understanding of how it works you can actually chat with ChatGPT. This is one thing that AI is pretty good at.

Nicholas L. · Answer

@Jonathan Wong

rental income is taxed yearly, not monthly.  mortgage principal is not an expense - only the interest is.   and - there are other expenses you have omitted that you would likely be able to deduct in a year (like repairs and property management).

and, there will likely be interplay with your other sources of income.  depending on your AGI you might even have passive losses from your rental income.

i suggest reading this

Rental Income Taxes - What Property Investors Need to Know (2023)hope this helps

Michael Plaks · Answer

@Jonathan Wong

Oops, I did not notice a gross calculation SNAFU - thanks to @Chris Seveney for noticing!

In my earlier answer, it should say $26,400, not $14,400

Henry Lazerow · Answer

Yes it does but you get to write off depreciation which makes you pay taxes on way less money then you actually make so it evens itself out.

Marina Draper · Answer

Your monthly reportable NET income before depreciation and any other deductions is going to be: $2,200 rental income - $500 Interest - $300 Property tax - $200 Insurance = $1,200, or $14,400 annual.

Mortgage principal payments are not deductible and will decrease your debt to the Bank.

Mortgage principal payments are not deductible and will decrease your debt to the Bank.

Jonathan Wong · Answer

All - thank you very much. This makes so much sense now.

Jason Malabute · Answer

Great question, and it trips up almost every new landlord because writing that principal check sure feels like an expense. Here's the deal though: you report the full rent as income, so $2,200 a month comes out to $26,400 for the year, and then you back out only the pieces that actually count as deductions, which are your mortgage interest, property taxes, insurance, plus repairs, management, and other ordinary costs. The principal portion of the payment doesn't show up on your profit and loss at all since it's just paying down the loan balance. On your numbers that leaves roughly $14,400 before depreciation, and once you layer depreciation in on top of that, the taxable figure usually drops even further, which is exactly why a rental can cash flow nicely yet show little or no taxable income. Just don't skip the depreciation piece, because the IRS treats it as taken whether you claim it or not, so getting your cost basis and depreciation schedule set up right from day one matters more than most people expect.

Ashish Acharya · Answer

Good question, and this trips up a lot of new landlords because principal repayment feels like it should count as an expense since it's real cash going out the door, but the IRS doesn't see it that way. Your reportable rental income starts with the full $2,200/month in rent, which is $26,400/year, and from that you deduct the actual deductible expenses, mortgage interest, property taxes, insurance, and later depreciation. Like Cory said principal payments are not an expense, but a balance sheet adjustment to the loan balance.

So using your numbers, before depreciation you'd have $26,400 in rental income minus $500 interest, $300 taxes, and $200 insurance per month, which is $12,000/year in deductions, leaving $14,400/year in taxable income before depreciation. Once you factor in depreciation on the property, that taxable number will drop further, which is one of the reasons a many rentals show positive cash flow but little to no taxable income, or even a paper loss.

Worth keeping in mind that depreciation isn't optional, the IRS assumes you took it even if you didn't, so getting a proper cost basis and depreciation schedule set up correctly from the start matters a lot more than people realize.

Happy to connect!

Does Mortgage Principal Count Toward Taxable Rental Income?

Does Mortgage Principal Count Toward Taxable Rental Income?

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