All Forum Posts by: Mark Sanchez

Brian, you're awesome! I'm so happy that you were able to understand my (perhaps very unsophisticated) way of asking about this. And yes, I'm looking at my Schedule E and your explanation does make sense. Thank you!

Thank you very much to all respondents, and sorry if I confused anyone!

Hi Simon,

Sorry if my question is confusing, and perhaps I'm inquiring about this from the wrong angle. I've had success buying with 100% financing, managing properties myself, managing my property managers, selling/buying via 1031 exchanges, and other things. I keep track of all money coming in and going out, provide my CPA with all of my numbers, and she prepares my taxes. My tax returns have always been favorable, so I'd never looked into the actual nuts and bolts of the tax side. But lately I've been trying to figure that part out.

Hi Simon,

According to Allan, "Principal pay down does not have impact on current year taxes", and if the original mortgage amount, if totally paid off, isn't subject to tax at sale, my ultimate question is:
At what point would I feel a tax impact from all of that rent money that was funneled to paying down my mortgage balance?

Hi Allan,

Thank you for your response. I'd like to not address extra principal payments, as they were not part of my original question, and in order to keep things as basic as possible.

But your response does lead me to a separate question about principal pay down:

Say that I put $100k down on the purchase of a $400k rental property, and have a starting mortgage balance of $300k. After 30 years I fully pay off the mortgage, following the original amortization schedule (no extra principal payments).

If I sell the property and put $600k in my pocket, from my understanding my down payment of $100k would not be subject to tax, $200k of gain (exceeding the purchase price) would be subject to capital gains tax, and the full amount of the depreciation that shielded some of my cash flow over the first 27.5 years would be also be subject to capital gains tax (depreciation recapture). How would the $300k (original mortgage balance) be treated?

The original $300k mortgage balance would have been paid back to the mortgage holder via principal pay down over 30 years with funds that came directly from rents collected. Is it time to "pay the piper" on all of that principal pay down at the time of sale? When does the other shoe drop on the principal pay down? Or does the other shoe never drop?

Thank you Simon, I do keep my own books and I do have a CPA who specializes in real estate to handle the review and to file.

I've been an investor for eight years and have grown at a good pace, reinvesting 100% of my profits and using money from my day job to cover many expenses. I want to use all of the resources available to me to keep the growth going.

I'm constantly analyzing my own situation from every angle that I can think of. My example above is not my exact situation, but it is my best attempt to strip things down to the bone to arrive at an answer for a core question that I've been mulling over for quite a while, but could not figure out myself.

This discussion has helped provide much clarity for me, and I'm sure that it will help provide clarity for many others here as well.

Thank you so much again! And have a wonderful rest of your day.

Thank you for such a quick response, Simon!

In my example, I wouldn't be intending to pay down any extra principal, I'd only be intending to pay down the amount of principal required by my overall mortgage payment.

With your help, my takeaway is this:
It is possible that some of my depreciation expense could be able to shield the funds that are used to pay down the principal balance portion of my property's mortgage. It just depends on my unique set of circumstances.

Thank you very much for such a detailed response!

If income from my W-2 job is above $150,000 and I am not an Re professional and I have no other business, in my zero cash flow example above, would some of my depreciation expense shield the funds that were used to pay down the principal balance portion of my property's mortgage?

Hi all!

If I had a rental property with exactly zero cash flow at the end of the year (after paying for mortgage/escrow/insurance/maintenance/etc.), would some of my depreciation expense shield the funds that were used to pay down the principal balance portion of my mortgage? If not directly in accounting terms, perhaps in a roundabout/in the big scheme of things way?

In this situation with exactly zero cash flow, since the funds used to pay down the principal balance portion of my mortgage would come from rents collected, it seems logical to me that some of my depreciation expense would shield those funds, rather than 100% of my depreciation expense carrying over into the next year.

Thoughts? And thank you in advance!