Assessing Rental Income Tax For Potential Purchase

[Rachelle Malkoff]

My husband and I are looking at some rental property options in the Boston area and using Net Operating Income (NOI) to assess if the properties would cash-flow based off of downpayment, mortgage rate, rent rate, maintenance, etc. BUT....NOI doesn't include taxes on rental income as a factor in achieving cash-flow even the property comparison spreadsheets I've used don't include rental income taxes.

How did you consider income taxes on cash flow when evaluating the potential of a property?

[Joe Splitrock]

Quote from @Rachelle Malkoff:

My husband and I are looking at some rental property options in the Boston area and using Net Operating Income (NOI) to assess if the properties would cash-flow based off of downpayment, mortgage rate, rent rate, maintenance, etc. BUT....NOI doesn't include taxes on rental income as a factor in achieving cash-flow even the property comparison spreadsheets I've used don't include rental income taxes.

How did you consider income taxes on cash flow when evaluating the potential of a property?

 Cash flow is different than taxable income. You can have a property with negative cash flow, that shows taxable profit. You can also have a property with positive cash flow that shows a tax loss. 

That is because the only portion of a mortgage payment that is tax deductible is the interest and insurance. 

There are also expenses you find in a deal calculator that do not reduce your taxable income like CAPEX and possibly even vacancy (depends if you actually have vacancy in the given year).

Most properties end up with very low taxable income due to depreciation, which will not calculate into your cash flow. Depreciation is purchase price minus land value divided by 27.5. 

That all being said, the very best deals will show taxable income. Even if you use acceleration or other strategies to show a loss in the first couple years, taxable profit is hard to avoid over time. It is just a cost associated with being successful.