Positive Cash Flow
Greetings,
First time investor. I was curious to know, if I cash flow say $100.00 a month from a rental, do I have to report that as extra income to the IRS? What is the advantage to negative cash flow to positive? Need some advice. Thanks in advance.
Man, now, this is a bizarre question...
Sorry, but it just struck me as that. Let me paraphrase the last question. "What is the advantage to making money, as opposed to losing money?" lol
If you've got a negative cash flow, it's NOT a good deal, plain and simple. Granted, that's not ALWAYS true, and there are mitigating circumstances, but if you're losing money each month on ONE house, what if you had 10? 15? 20? How long would it be before you were bankrupt? And, if you want to pay someone to live in a house, go find a bum under a bridge, and sponsor them, same effect, and LOTS cheaper.
You report ALL income to the IRS, however the only part that's taxed is your profit, which is derived from subtracting cost from income. There are numerous tax benefits you gain from rental properties, but you need to talk to your friendly, neighborhood tax professional to find out which ones apply to you...
Good luck with it!!!
Jam200,
Thanks. As you can see I am a newbie. I have just been reading books which seem to state if you produce negative cash flow, you can write that negative cash flow off. I see your point though. Thanks for the reply.[ Edited by JRendell on Date 10/28/2004 ]
Hi and Welcome,
Read about how taxes work with a rental. If not a book, go to the IRS site and look at a Schedule E. Read about depreciation and allowable deductions. The reason that you will read that a negative cash flow can be ok with a rental is because it can offset earned income(your day job), thereby reducing taxes you pay...just like owning your own home, except you can use even more costs in a rental! You can have a good positve cash flow and still have a negative on your taxes. The beauty of RE!
This site is great in that no matter what you do or have done, you can learn to do more or 'better'.
Meanwhile, I can tell you that I overpaid and had a negative cash flow on my 1st rental in 1991. But 'thru the years' it only gets better baby, and that 'all wrong purchase' has doubled in FMV, makes 2x pymnt in rent, and I have 150K equity in it towards retirement planning. So, if you take care of business it will be ok even if you don't start out doing things 'right'. and/or making the big bucks. Slow and steady wins the race.
Good luck~
IF the home is worth 100K at a minimum you will have 3600 in write offs. THis would give you $100 a month free and clear with no tax paid on it
[addsig]
Thanks ceinvests and Stockpro99. That was exactly the type of response I was looking for. I will look into it and keep your response in mind. Thanks again.
If you're in a 30% tax bracket then for every $1000 that you loose, you can offset $300 of taxes. Not a very good tax strategy. Keep in mind, you still lost $700.
Now it used to be true that with Accelerated depreciation you could do much better because you could have depreciation loss (aka a paper loss) that was big showing a net loss, when in reality you actually made a bit of money. In that case High income earners could offset huge amounts of income with a rental property. The laws have changed. Paper losses are still there and will still offset a significant amount of income, however it is not as good as it used to be.
A cash flowing property is always better than a non cash flowing property. That said, a break even property may be better for you than it would be for someone who doens't need the tax deductions. Keep in mine, CF properties are always better.
if you have $100 a month neg. ash after expenses the only "advantage" sort of speaking is the tax write-off.......km
p.s. this is an advantage only if you have "big" money income already and are paying in huge amounts of taxes. the neg. is used to redirect the tax dallors paid into the irs to being paid toward your future appreciation of the prop. large corps. do it all the time. its in the same ballpark as a donation.........km[ Edited by kenmax on Date 10/29/2004 ]
Do you include equity in your cash flow calculation?
In my case, I have few properties 15 yrs term. I just don't want too many properties at one time. So I would like to payoff some . As a result , I have to add $100-$200 to cover my mortgage payment. I did this long b/f I am more serious with REI. I don't want to ref now, b/c my rate is good and I don't want to start all over again and pay all those closing fees. I figure that if I can't handle it, I can refinance Or if I need cash, I can take second mortgage or HELOC. My primary resident mortgage payment is way below what I qualify for. So my D/I is ok. Any input/suggestion? Thx.
Quote:Do you include equity in your cash flow calculation? ew86,
I assume you are referring to the portion of your monthly mortgage payment that is applied to the principal balance on your loan.
Cash flow = (Net Operating Income) minus (Debt Service)
So yes, equity increase from a reduction in your loan balance does come out of your net operating income and is already factored into your cash flow equation.
However, I wonder if you are really asking if the entire mortgage payment is a deductible expense. This answer is NO. Principal payments are not a deductible expense, but the interest you pay on the borrowed money is.