is cash flow taxable income ? how is it taxed ?

Question

would appreciate any information

Greg Scott · Answer

This simple question is fairly complex.

Cashflow is not the number that is taxed.  Net income is what gets taxed and that is different than cashflow.

If you are managing your business correctly, usually cashflow is higher than net income because depreciation expense lowers your net income and depreciation is a non-cash expense. We love putting cash in our pocket and paying little or no tax.

On the other hand, you can create situations in your business where you generate positive net income that does not result in cashflow.   In that case, you would have no cash in your pocket but get tax bill.

Assuming you are using an LLC or a sole proprietorship, you pay the taxes on net income when you pay your personal income taxes.

Account Closed · Answer

happy to help!

Account Closed · Answer

Depends on the nature of it. Cashflow is simply what is left over after an asset generates revenue and pays all of its expenses. That is referred to in the tax world as net income. Then we need to characterize that income. Is it active or passive? Under the rules in section 469 of the tax code we then need to tax is accordingly. Passive income is generally more desired from an investor's point of view because they get a lower tax treatment than active income.

Kory Reynolds · Answer

In a general way...yes.  Generally from the day you purchase a property through the day you sell it (in a taxable transaction), you'll be taxed on your net accretion of cash flow over that time period.

The timing of when income is taxed is likely going to be much different than when the cash flow is received though.

Jason Malabute · Answer

Hi Kaylin,

Cash flow isn’t directly taxed; instead, it’s your net rental income that’s subject to taxation. Net income is calculated after accounting for deductible expenses like mortgage interest, repairs, and depreciation.

Depreciation is particularly important because it’s a non-cash expense—it’s a paper expense that reduces your taxable income but doesn’t actually require you to spend cash out of pocket. This means you can often have positive cash flow from your property while reporting lower taxable income, or even a loss, thanks to depreciation.

So, while your cash flow might be strong, your taxable income could be significantly lower due to these non-cash deductions.

Basit Siddiqi · Answer

Taxable rental income = Cash flow + principal payments - depreciation.

Sean O'Keefe · Answer

@Kaylin Gonzalez

No, just taking the cash flow will not give you taxable rental income.

You need to take Rental Income less Deductible Rental Expenses (e.g. depreciation, utilities, etc.) and this will give you Taxable Rental Income.

Ash Hegde · Answer

Cash flow and taxable income are separate calculations. The main difference is that you can't deduct the principal portion of your mortgage payment (even though it affects cash) but you can deduct depreciation (even though it doesn't affect cash).

Usually the depreciation is enough to shelter your income so that you pay little to no tax, at least on a new long term rental.

John Morgan · Answer

@Kaylin Gonzalez

In a nutshell, the way the tax code is set up, you won’t be paying any taxes on your cash flow. Too many write offs the govt gives out to incentivize investors to invest in RE. If you’re paying taxes on your cash flow, then you’re probably doing something wrong. lol

is cash flow taxable income ? how is it taxed ?

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