Is Investment Property Principal Paydown Considered taxable income?

[Mehran K.]

Hi all,

At my family party yesterday I had a chat with my uncle who owns an apartment building and is very successful in other businesses. He told me that any principal paydown on an investment property is considered taxable income because the amount payed down has gone from a liability to an asset. This is the first I've heard of this and it just doesn't sound right. I wanted to run it by some of you tax guys!

I know he owns the apartment building in an LLC and has other entities for his other businesses if that can factor in on this tax situation.

Thanks in Advance.

[Jon Holdman]

The actual paydown amount isn't taxable. That is, if you start the year with $100,000 in debt and you end the year with $95,000 in debt, you do not have $5000 in taxable income.

Now, what he might be referring to is the principle paydown isn't a deduction. If your total payments for that year were, say, $20,000, and $5000 of that went to paying down the principle and $15,000 went to interest, only the $15,000 is deductible. Not the full $20,000 you actually mailed to the mortgage company. The interest is paid with pre-tax dollars and the principle is paid with after tax dollars.