Rental Tax Question - taxes on cash flow

[Walt B Philip]

Just getting started with rental property investing and I'm wondering if the cash flow generated above and beyond all expenses (PITI etc) is taxable as income in NJ.

Numbers to illustrate the question: PITI is $3000/month and rent is $4000, so cash flow is $1000. Is that 1000 taxable?

[Evan Polaski]

@Walt B Philip, I am not a NJ resident or investor, but yes and no.  You will take your 4k/mo, subtract interest, taxes and insurance.  Your principal is not deductible, so you are technically going to owe taxes on your principal repayment.

But you also will write off management fees (if you pay any), leasing commissions, repairs and maintenance. Some CAPEX will be able to be expensed, and some will be capitalized and depreciated over the useful life of that item. There is a chance that you could be showing taxable losses with positive cash flow, based on various accounting rules.

The moral of the story is: your cash flow is not directly correlated to your taxable income, and you will owe taxes at a federal, and likely state, level on your taxable income/losses.

Note: I am not a CPA or tax advisor.  I did my own taxes in turbo tax for many years, but when I started buying rental properties, I hired a CPA to make sure that I was doing things correctly.  I.e. I bought houses that needed a lot of work.  Everything you spend to make them rentable, but prior to having your first tenant, is capitalized.  Once you have your first tenant, a lot of that similar work can be expensed.