Tax Deductions Exceeding Income

[Michael Sawers]

I have been analyzing houses for almost a year now.  I understand the basics and really just need to dive in.  One thing that has been a little confusing to me are the tax deductions.  Off the top of my head, you can deduct the following:

• PMI
• Home Insurance
• Property Tax
• Managers
• HOA Fees
• Depreciation (80% of assessment divided by 27.5????)
• And the big one, interest paid on mortgage.

While analyzing the data on a few houses, I noticed that the first 3-4 years tend to have larger deductions than total income.  I believe the largest reason for the high deduction is due to the "Depreciation Deduction".   In one case, I calculated a RETURN of $290 just from my rental property lumped into the same pot as my current salary.  Is this possible or am I deducting too much.  This same property will cost me $5440 at the end of the mortgage where I am paying hardly any interest.  Does this make sense to you experienced investors?

Just in case you want the numbers, I've posted them below:

• Purchase Price $165,380

Monthly Expenses

• Mortgage: $630.69
• PMI: $0
• Home Insurance: $66.67
• Property Tax: $157.50
• Manager: $256.62
• HOA Fee: 0
• Maintenance: (I don't deduct this) $166.67

Monthly Income

• Rent: $1400
• Vacancies: $116.62
• Income: $1283.38

Yearly Cash Flow

• $62.79

Yearly Deductions

• PMI, Home Insurance, Property Tax, Manager, HOA Fee: $5769.48
• Interest Paid on Mortgage: $5578.03
• Depreciation: $165,380 * 80% / 27.5 = $4811.05
• Total: $16,158.56

Adjusted Income

• Yearly income: $15,400.56
• Yearly Deductions: $16,158.56
• Adjust Yearly Income: ($758)