Handling principal payments & depreciation on a non-cash flowing property at tax time

[Mark Sanchez]

Hi all!

If I had a rental property with exactly zero cash flow at the end of the year (after paying for mortgage/escrow/insurance/maintenance/etc.), would some of my depreciation expense shield the funds that were used to pay down the principal balance portion of my mortgage? If not directly in accounting terms, perhaps in a roundabout/in the big scheme of things way?

In this situation with exactly zero cash flow, since the funds used to pay down the principal balance portion of my mortgage would come from rents collected, it seems logical to me that some of my depreciation expense would shield those funds, rather than 100% of my depreciation expense carrying over into the next year.

Thoughts? And thank you in advance!

[Brian G.]

@Mark Sanchez yes. Principal pay-down can be offset by the depreciation write off if you are cash flow neutral. If you study your Schedule E you will see that Rents Received is at the very top (line 3) which you are using to pay your mortgage (including the principal pay-down). All the expenses are below that including property taxes, insurance and interest (usually part of your mortgage payment and your mortgage company will send a 1098 with those amounts for filing). Depreciation is also listed as an expense (line 18). Principal pay-down is not an expense. So if you are exactly cash flow neutral and you pay $5k down on principal on your mortgage balance over the course of a year and your depreciation write off is also $5k your taxable income on the property will be $0. Formula -> Rents Received - all real expenses (not including principal pay-down) - depreciation write off = taxable income (line 26). Hope that makes sense.