How can rent payments be tax free when paying down a mortgage?

Question

Hi, I have listened to the podcast and have heard Brandon and David talk about good debt. I am stuck on how rent from tenants could not be taxed when paying down a mortgage. I can understand how the IRS could see rent as an income and subject to tax but is possible to not be taxed? I appreciate any explanation. Thanks in advance

Rj Lindemann · Answer

Hi Nevin! While I'm not a CPA, I am an investor and I'm studying accounting in college. The IRS does consider rent income. If you choose to do so, you can pay taxes on all of it. However, what most investors will do is "write off" certain expenses that they have through deductions. Just like you get deductions for dependents, charitable donations, yourself, and many other things you can also deduct expenses related to your property in order to avoid paying taxes on your rental income.

Expenses you can write off might include insurance, property taxes, the interest portion of your mortgage payment, repairs and maintenance, depreciation of your building, and any other reasonable expenses you might incur though the investment.

I hope this helps, let me know if you have any more questions!

Amy A. · Answer

Net rental income is taxed, but often when people are first starting out the expenses plus depreciation are often more than the income.  Don't forget that the portion of vehicle use for your rentals is an expense as well. You can write this loss off against other income as well (up to $3000 if you're not a real estate professional).  Depreciation allows you to have positive cash flow but a net loss on paper, until you sell the property and the depreciation is recaptured.

There are entire books written on this subject, so there's a lot to learn!

Nicholas L. · Answer

@Nevin Rasor net income is taxed.  You have to do the math.

Basit Siddiqi · Answer

@Nevin RasorYou are required to report rental activity on your tax return.Rental income is hopefully $0 or less when you factor in depreciation and other personal expenses that are shifted over to business deductions.best of luck

Joe Villeneuve · Answer

Yes

Nevin Rasor · Answer

@Joe Villeneuve when you say net income, it's the same as net operating income?

Joe Villeneuve · Answer

No.  Like @Nicholas L. said, it has to be a "net".  In other words, it has to be offset by a deduction.

How can rent payments be tax free when paying down a mortgage?

Most Popular Reply