Tax Impact of Loan Amortization on Rental Property

2 Replies

Hi folks!

I'm putting together a Capital Accumulation Comparison (a la What every real estate investor needs to know about cashflow...) and I'm wondering if anyone could explain the tax impact of loan amortization to me.

Specifically- 

Does loan amortization count against deductions I can make for that tax year? e.g. is $10k worth of interest payments and $5k of amortization in a year a $10k deduction or a $5k deduction (or something else entirely)

Does loan amortization get counted as "income" when I am computing the passive gains/losses generated by the property? e.g. if my cashflow is -$100 a month and my amortization is $1200 for the year, are there $1200 of deductions I can make (provided I meet the criteria for deducting passive losses) or is my negative cashflow offset by the loan amortization

Thanks for the help BiggerPockets!

Tyler

I think I understand what you are asking. 

A mortgage payment is split into two pieces, interest and principal. The interest is deductible. The principal repayment doesn't show up anywhere on the tax forms.  

With a modified form of your example  "e.g. is $10k worth of interest payments and $5k of amortization principal payments in a year a $10k deduction or a $5k deduction" 

The $10k interest payment is deductible. The $5k principal payment is not. 

@Tyler Galdes

Your terminology needs more clarity.

When you start a loan, you create an amortization schedule or amortization table. This table shows how each monthly payment is split between interest and principal. Initially, almost the entire payment is interest, with minimal principal. Gradually, a bigger portion goes to principal, and the interest portion starts shrinking. Also gradually, the remaining principal balance of the loan goes down. Very slowly at first, and it gets faster as the loan matures.

If this is what you were referring to, then the interest is the only tax deduction. There is no deduction for the principal portion of your payments. (Instead, there is a depreciation deduction which is not based on the loan - a very different topic.)

There is another amortization: amortization of the loan costs, such as origination fees, points, appraisal etc. Those are evenly divided over the length of the loan, and it is an additional deduction.