Income but Negative Cash Flow- Beginner

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Income but Negative Cash Flow- Beginner

Jennie E.Pro Member
Member since 2020 · 7 posts · 2 votes

Hello,

For the first time I worked with a CPA who specializes in real estate and was really excited since I was hoping to have more write offs this year however the opposite was true. I've had a rental for a year and most of the year I had negative cashflow (not anymore) but on my tax returns it showed that I made a few thousand dollars, which I didn't because most of the rent went straight the note of the home (which was more than the rent I was collecting). My expenses exceeded my revenue. The items that they wrote off did not cover my "income." Long story short, it showed that I made a decent amount last year when in actuality I did not; I was negative most of the year. I'm in CA so I had to bit the additional depreciation increase. So obviously it increased my net income, which I was taxed more on. That being said, how do people offset it since most need to pay the mortgage/note? I'm just really surprised. Any advice would be greatly appreciated!

Side note: I refi the loan so CF is not negative. 

Jennie E. 

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Justin Hammerle
Realtor · Providence, RI · Member since 2022 · 404 posts · 262 votes
3y

@Jennie E. - this is a better question to ask the CPA that did your returns if you haven't already; but my hunch is that your rental income exceeded your interest and tax payments as a net.  You can't deduct the principal payment.

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  • Justin Hammerle
    Realtor · Providence, RI · Member since 2022 · 404 posts · 262 votes
    3y

    @Jennie E. - this is a better question to ask the CPA that did your returns if you haven't already; but my hunch is that your rental income exceeded your interest and tax payments as a net.  You can't deduct the principal payment.

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    3y

    Negative cashflow properties can definitely be making income. But with depreciation you actually had to make more than the interest , insurance, property tax (probably 80% of you payment, so maybe 15-20% of your mortgage payment is profit.) and about 4% of what you paid for your building.  So you had to make quite a bit of money to pay any taxes the first 5-10 years. 

    EX: $400k property  with a 30 year 5% mortgage with $2400/property taxes and $1200 insurance would have a payment of $2450, $480 principle and $1670 interest, $200 taxes and $100 insurance. You collect $2,100 in rent. So your profit is $2,100 minus $1670, $200, $100 or $130/mo. $1,560. BUT. Your rough depreciation would be 80% of $400k (assuming land is worth 20%mof purchase price.) divided by 27.5 years. ($320k sided by 27.5 years is $11,600 depreciation). So you have a taxable loss of over $10k.  

    Every $100k you buy can produce about $3,000/year tax free. Your cpa should walk you through this. Good luck. 

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  • Bryan MartinBusiness Member
    Accountant · Springfield, IL · Member since 2022 · 189 posts · 100 votes
    3y
    Quote from @Jennie E.:

    Hello,

    For the first time I worked with a CPA who specializes in real estate and was really excited since I was hoping to have more write offs this year however the opposite was true. I've had a rental for a year and most of the year I had negative cashflow (not anymore) but on my tax returns it showed that I made a few thousand dollars, which I didn't because most of the rent went straight the note of the home (which was more than the rent I was collecting). My expenses exceeded my revenue. The items that they wrote off did not cover my "income." Long story short, it showed that I made a decent amount last year when in actuality I did not; I was negative most of the year. I'm in CA so I had to bit the additional depreciation increase. So obviously it increased my net income, which I was taxed more on. That being said, how do people offset it since most need to pay the mortgage/note? I'm just really surprised. Any advice would be greatly appreciated!

    Side note: I refi the loan so CF is not negative. 

    Jennie E. 

    Agree with Justin that your CPA would be the best person to handle this and it's going to be hard for any CPA or accountant on here to answer your question about seeing the actual return (and possibly the source documentation).  Possibly the land on your property is much higher proportion on the value, causing the depreciation to be not as high as needed to offset the income.  But that's just one thing out of many that could be happening.  I would recommend reaching back out to your CPA.
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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    3y

    As @Justin Hammerle indicated, you cannot deduct the principal portion of your mortgage payment.  Based on your post, I think this is the most likely culprit for your misunderstanding of how real estate taxes work.

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  • Jennie E.Pro Member
    OP
    Member since 2020 · 7 posts · 2 votes
    3y

    Hello everyone, Thank you for your detailed responses, yes for I finally realized that along with other items (living in CA and investing out of state). Definitely planning differently for the upcoming year. 
     

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