Tax question. Total cash flow or AFTER income - expenses?

6 Replies

Dumb question or maybe I’m not thinking this correctly.

What’s actually taxed? The total cash flow just after the mortgage is paid? For example;

Mortgage payment $1000, rental income $1500. So is the $500 that’s being taxed?

Or is it AFTER the expenses ie the "reserve funds" (HOA, Vacancy, repairs, CapEX)? So in actually, more close to $150 that's being taxed after mortgage ($1000) is paid from the rental income ($1500)?

@Min Kim

Neither.

What you're describing are balance sheet movements that never hit the P&L.

e.g. the principal component of a mortgage payment is just a decrease in cash and a corresponding decrease in a liability.  It's not an expense.  Reserve accounts are just movements of cash between accounts.  They're also not expenses.

Taxable income =/= cash flow.

Start with your P&L (which isn't the same as your cash flow statement), then add in non-cash items such as tax depreciation and amortization.

    @Min Kim

    Generally speaking, rental income(rents collected + other fees collected, etc) less expenses(mortgage interest expense, real estate taxes, insurance, depreciation, etc) is taxed.

    Some differences between cash flow and rental income that is taxed is principal payments and depreciation.

    Principal paydown is not a tax deduction. The IRS also allows a deduction for depreciation.

    You may want to consider working with an accountant to help you navigate through this.

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