How does cashflow get taxed?

[Dan Shelhamer]

So I just closed on my 1st SFR last week, and am hoping to have a tenant in by June 1st. A couple questions I have.

I was going to set up my LLC within a couple months as I plan to grow this into a full time business in the next couple years. I have heard some people on here say that if you deed a property into an LLC it can cause the due-on-sale clause to come into effect. Is this true? I was thinking of just doing a $1 million umbrella over all of my assets instead.

Also, how does the cashflow get taxed as I have heard if you do it correctly you should pay almost no tax on your cashflow?

Thanks!

[Linda Weygant]

The taxes are going to completely depend on your purchase price and your overall income and expenses.  It is quite common for a rental property to have a positive cash flow, but still show a loss on taxes due to depreciation, which is a non-cash expense.

Let's say you buy a house for $200,000 and rent it for $1500 per month.  Your deductible expenses are $900 per month and the principal amount of the mortgage (which isn't deductible) is $150 per month.  So you've got positive cash flow of $450 per month.

At the end of the year, before depreciation, you report $7200 of profits ($600 x 12) and you've had positive cash flow of $5400 ($450 x 12).

However, you also include depreciation in your expenses.  Residential rental is depreciated over 27.5 years, so your depreciation expense is $7272.

Voila!  You've just wiped out all your profits from a tax standpoint and no tax is due.