No income but plenty of cash

[Jon Holdman]

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.