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Updated about 13 years ago on . Most recent reply presented by

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Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
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No income but plenty of cash

Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
ModeratorPosted

More than once someone has written something to the effect "I have plenty of cash but no income on my tax return." Usually in the context of trying to get a loan. I do understand deducting expenses, depreciation, and interest and the difference between taxable income and actual cash flow. But I still don't see how you end up with plenty of money in your pocket but no taxable income.

For example, consider a classical BiggerPockets 2% deal. Rent of $500. You pay $25K. By some miracle, you get a 5% 30 year fixed loan for 100% of the $25K. Assume you do this deal on Jan 1. Lets use all the simple assumptions about 80/20 split for depreciation. And lets assume your expenses and vacancy really are 50% and you have no capital (just to simply the depreciation calculation.)

Numbers are annual

Rent: $6000
NOI: $3000
P&I: $1610.46
Cash flow (before tax): $1389.54

Depreciation: $727.27
Interest: $1241.62
Taxable income: $1031.10

So, there's my quandary. This is a "good deal" and produces real cash flow. But it also produces taxable income.

Now, I understand you can take lots of deductions for running a landlord business. But those are, for the most part, included in the 50%. The ones I would say are not would be expenses associated with hunting down new deals and, if you set up as a C-corp, fringe benefits like health insurance.

Now, with a classical 1% rule deal, say you pay $50K for $500 in rent. With the same assumptions, I get negative cash flow of $220.93 and a passive tax loss of $937.79.

OTOH, if you're self managing and not counting anything for the management cost (so, expenses, capital and vacancy are one third of rents), I come up with $779.07 in cash flow and only $62.21 in taxable income. Is that you folks get to "plenty of cash and no income?" I don't get it.

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Jon Klaus
  • Developer
  • Garland, TX
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Jon Klaus
  • Developer
  • Garland, TX
Replied

I've assumed that this "chunk of cash" has come from somewhere else and not from REI income. Examples; inheritance, insurance settlement, sale of primary residence, nest egg from good job they used to have, sale of business proceeds, etc.

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