How to Calculate Appropriate Cash Flow on Rent
When the housing market is tight, an alternative to selling your real estate property is to rent it out. Real estate ownership can be expensive, but thanks to numerous tax deductions available to you as a real estate investor, you can receive a profit from your gross rental income each month. To find out whether your investment makes financial sense for you, you must first calculate your cash flow.
Instructions
- 1
Add your gross rental receipts received during the calendar year. This includes any money paid for future rent; you must report advance rent in the year you receive it. Do not include money received for security or pet deposits.
2Tabulate your administrative expenses for the rental property over the calendar year, such as repairs, maintenance, insurance and property taxes. Add your mortgage interest expenses from Form 1098, Mortgage Interest Statement, provided to you by the lender.
3Calculate your depreciation deduction. Start with the cost basis of the rental property, excluding the cost of the land. Divide that cost by 27.5 to determine your depreciation expense. The depreciation deduction must be spread out over the span of 27.5 years. For example, if your rental property cost $100,000, divide it by 27.5 to arrive at your annual depreciation expense of $3,636.
4Subtract the administrative and depreciation expenses from your gross rental receipts. This will yield your rental loss for tax purposes. Individuals with an adjusted gross income of less than $100,000 who are not professional real estate agents are eligible to deduct a rental loss up to $25,000 from other taxable income. Multiply your total rental loss by your personal federal income tax rate, which can be found at IRS.gov. This tax savings is added to your cash flow.
5Add your rental income with your tax savings. Subtract your total administrative expenses. Subtract the total sum of mortgage payments, including principal and interest. The resulting figure is your cash flow.
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