Debary, FL · Member since 2017 · 110 posts · 113 votes
I have a question on what gets taxed when it comes to rental income. Of course there are loads of other factors but I'm looking for general answers for someone living in the US without state income taxes.
For example, say I have a single-family home bought for the purpose of being a rental property that works as follows:
Rent: $1000 month / $12,000 annual
And it breaks down like this:
$2000 - property tax
$2000 - insurance
$2000 - mortgage principal
$2000 - mortgage interest
$2000 - repairs
$2000 - unused/profit
Which pieces are taxed? Would the property taxes, insurance, mortgage interest, and repairs be considered untaxable business expenses?
I assume the final unused/profit $2000 would be taxed like regular income, but what about the mortgage principal? Since it represents owning the renter buying me a piece of the property itself is it considered income?
You get tax deduction on all except mortgage principle. Principle payment is not tax deductible. On top off all expenses you have listed, you can also take deduction for depreciation on your rental property.
You can take other deduction like property management expenses, auto mileage incurred related to rental property, home office deduction etc.
total collected income (rent, mostly, but might include utilities, late fees, etc)
less
total expenses (taxes, insurance, repairs, mortgage interest (only, not principal), legal fees, utilities, etc.)
and less
depreciation (based on the value of the improvements when you original bought the house plus money you spent getting the place ready to rent, and also capitalized items like roofs, flooring, etc.)
You pay the tax on this amount, if its positive. If its negative, you may be able to offset other income with this "passive loss".
Your cash flow is a different number because depreciation is a non-cash "expense". Further, if you have a big capital item, like new flooring, you'll have to lay out that cash in one year, but it gets deducted over five years (six tax years, unless you spend the money on the first day of your tax year.) It doesn't matter what you do with the cash flow, it has no effect on the taxable income.
Principal payments are relevant for your cash flow, but not for profit. Principal payments are simply transfers from one of your accounts (e.g., your bank account) to a different account (equity in the property.)
Great thanks! I knew thinks like depreciation and mileage come into play, but I was really curious about the taxable aspects of those key things (principal, mortgage interest, property taxes, and insurance).
Months ago I thought that at the end of the year I should pay as much as possible on principal to reduce my income while simultaneously paying back something I have to pay anyway, and then it hit me that this probably wouldn't work.