Cashflow Taxation Problem

[Jack Lee]

Hey guys, I have a question.

Hypothetical scenario:

SFR
$1000 NOI

$500 Service on a selling financing.

Cashflow = $500

Are you taxed on the $1000 NOI or on the $500 cashflow?

[Jon Holdman]

Interest is an expense. Your taxable income from a rental is:

actual collected rent - actual expenses - interest - depreciation

Actual expenses are the things you spend money on that's deductible in the year you spend the money. Insurance, property taxes, maintenance, etc. Schedule E has a list of categories.

Interest is interest you pay on a mortgage on the property for money you borrowed to improve or buy the property.

Depreciation is the depreciation based on your basis plus depreciation on capital items (i.e. cabinets, carpets, roofs, etc.)

Principle payments are not deductible. So with a bank loan that has $500 a month in P&I, your interest is going to be less than the full $500. Unless its an interest only loan. So, your interest deduction for the year might be $5500 early in the loan live, ramping down to zero as you pay it off.