I purchased an owner-occupied multi-family property. It is four units, and I live in one and rent the other three out. My unit is two bedrooms, another one is two bedrooms, and two are one bedroom units. I live in approximately 750 of the 2400 sq ft.

With regard to taxes, I was actually a bit confused recently when I went to my accountant. I was thinking that the income line for the property would be generated from the following:

INCOME
1. Rents received

EXPENSES
1/4 or 1/3 (depending on if you use units or sq ft used by tenants) of the following:

1. Mortgage
2. Taxes
3. Insurance
4. Maintenance and utility expenses (Electric, Water, Landscaping, etc)
5. Misc. repairs and expenses

I was told that #1 (mortgage) is not in the calculation, so therefore it is going to appear as if I have a greater income than I expected. Is this the case? He stated that it was because that is going in as equity - but what if a property goes negative or never has equity build? Also, it seems odd because if that is the case, a large part of my expenses go into something that doesn't necessarily pay back any interest at all.

I know this is basic, but I'd really appreciate any insight on this.

Thanks.