Principal portion of the mortgage on a Buy and Hold investment

[Abe Heaney]

Hello BP Community,

I am new to all of this and I am still in the learning phase of REI. Been reading a lot (rich dad poor dad, etc.) and listening to the Podcasts to try to find which niche would be a good fit for me to start in. Anyways, regarding Buy and Hold I had a question from a tax perspective.

Here are my assumptions:

- You own a single family or a multi family investment and you are currently generating minimal cash flow.  Let's assume you are generating $100 a month after all expenses.

- Every month the mortgage you have on the property is being covered by the rent you are collecting.

So here is my question.

- From a tax perspective, correct me if I am wrong, but isn't the Principal (portion of the mortgage payment) that is being paid (by the rent being collected)  considered as taxable income?

- Is your end of year taxable income on this project the $100 a month (assumed cashflow) plus the principal portion of the mortgage that was paid down throughout the year?

- Are there any strategies that can limit or minimize that tax liability?

Thanks for all your help.  This community is great.

[Chris Soignier]

Your train of thought mostly ends up w/ the right result, ex. that your way of getting there is a bit unconventional.     First off, net income, not cash flow, is the basis for income tax calculations.

You start w/ rent collected, then deduct interest, property taxes, maintenance, depreciation, utilities, etc., to arrive at a net income for the property.    Principal reduction is not deductible, but look on the bright side - your tenant is paying your mortgage, you depreciate the property, and usually get to benefit from appreciation.