Tax Questions about Rentals in CA

[Matthew Walker]

I bought a single family house with 5% down and am fixing it up while living in it with a friend. After renovating, I'd like to rent out the entire house. I can definitely manage to rent it for slightly more than all of my standard monthly costs (mortgage, PMI, home insurance, property taxes) but I did not think about taxes before buying.

Incase anyone is kind enough to break down the math behind taxes...For easy math lets say property value is 100K and my cost is $1000/month. Principle is $300, interest $500, $100 PMI, $75 home insurance and $25 property tax. If I understand correctly, I cannot deduct costs of principle or home insurance. I know repairs and improvements are a deduction, but not what I'm focused on here.

Let's also say rent is $1100/month. Does that mean I pay tax on $1100 - ($500+100+25) = 475? At 30% tax rate, (living in California) that means I'm paying about $140 in taxes monthly. This would easily turn this property into a cash flow negative in the current market. How much will depreciation help? Any other major deductions I am missing? Is there a way I can deduct principal payments if I start an LLC? Did I miss any tax benefits by buying the home as a person and not as an LLC?

I realize taxes are paid yearly, and any other costs on the property (repairs, improvements, property manager, travel costs, etc.) will reduce the income I am paying taxes on, but for now I am just trying to get a general estimate of the monthly breakdown.

Please point me to some resources that can help me understand how to best understand and handle taxes!