cash flow tax free?

Question

i have a simple question about cash flow from rental properties and taxes. is cash flow considered income? Will i have to claim my cash flow as income and be taxed on it? 'm just a little confused about this.

Ali Boone · Answer

You will be taxed on it, as mentioned, but the reason you often hear that rental property income considered tax-free income (from those who you might hear that from) is because after all the write-offs, mostly depreciation, the write-offs tend to offset what taxes you would normally pay on that income, so they cancel each other out. More or less. But you do still report it all normally.

Jean Bolger · Answer

It's not taxed the same as your income from a job. Rental income is reported on Schedule E on your taxes. Yes, you will be taxed, but only after deductions which include your mortgage interest (assuming you have financing) and depreciation. The depreciation deduction will reduce the amount you end up paying on the money you get from a rental. But you may have to pay back some of those savings when you sell the property.

This isn't the whole story, of course- it complicated, and I am not a tax expert! But I hope it helps with your question.

Jon Holdman · Answer

Rental income is taxable.  Cash flow is not the same as taxable income.  Taxable income is all the income you receive (mostly rent, but also anything else like utilities, laundry, etc.) minus all expenses.  Expenses include property taxes, interest (not the principal part of your payment, though), insurance, maintenance, CPA fees, legal fees, and a plethora of others, and depreciation.

Depreciation is complicated.  At the simplest, you take the costs of the improvements, divide by 27.5 and that's your annual depreciation.  The usual way for separating your purchase price into improvement and land is to look at the county assessors information.  They split land and improvements.  Use these figures to compute the percentage of the total for improvements, multiple by your purchase price and you have the the starting point for your depreciation.

Anything you spend before the house is ready to rent gets added into the basis.  And then major items like roofs, furnaces, applicances, flooring are always depreciated going forward.  The IRS has different lifetimes for different items.

As you take (or are allowed to take depreciation, if you take less than you're allowed) your basis goes down.  When you sell, the gain is the selling price, less selling costs, less the basis.  So the more depreciation you take the more your gain.  Further, the amount of gain up to the amount of depreciation taken or allowed, whichever is greater, is subject to a recapture tax, currently capped at 25%.  Any remaining gain is subject to capital gains tax.

cash flow tax free?

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