How will my cash flow be taxed? - Posted by Frank

Posted by David H on February 07, 2002 at 22:26:20:

Income is taxed.

Allowed expenses offset income.

IRS Publication 527 goes into more detail.

How will my cash flow be taxed? - Posted by Frank

Posted by Frank on February 07, 2002 at 21:23:36:

Rented out one house last year for 6 months. Rent was $1000 a month with positive cash flow of $250 a month. How will I be taxed on this? Will I have to pay tax on the $6000 I received in total rent or ONLY on the $1250 total I received in positive cash flow?

Re: Taxable Income on IRS Schedule E - Posted by Rolfe Kurtyka (Mpls/StP)

Posted by Rolfe Kurtyka (Mpls/StP) on February 08, 2002 at 11:30:00:

I’m not an accountant. That said, your cash flow is not taxed. What is taxed is the property’s taxable income.

Rental income is reported on IRS Schedule E, which grossly simplified looks something like this;

Gross Income ($6,000)
minus: operating expenses
minus: mortgage interest
minus: depreciation
equals: taxable income.

In many cases, especially during the first years of holding an investment property, taxable income is actually negative, even though the property is producing a positive cash flow. Depreciation is the main reason. As time goes forward rent income usually increases, while at the same time the interest portion of the loan payment decreases, eventuallly resulting in a positive taxable income.

Depending on the investor’s circumstances, the taxable loss (if any) may be applied against other passive (rental) income, or in some instances, the passive loss may even shelter an equal portion of active income, such as W-2 from a job.

John Hyre and others have posted some excellent comments on passive income. You might try searching the archives for “passive income”.

Good Luck, and good job on the cashflow!


Re: How will my cash flow be taxed? - Posted by jim

Posted by jim on February 07, 2002 at 23:36:48:

You must declare and pay tax on all $6000 of your income. However you are entitled to many deuctions, including mortgage interest and depreciation which you must take according to IRS rules. An accountant can help you take all the deductions you are entitled to.