In a book I’m reading, I am questioning how they are phrasing something and wanted a second opinion. The example goes as follows:
Annual rental income: $6,000
Annual expenses: $7,200
Annual loss before taxes:($1,200)
Annual depreciation adn interest: $2,000
Annual profit after taxes: $800
They’re clearly getting that by figuring a 1,200 operating loss is offset by a 2000 depreciation/interest ‘gain’, leaving them with $800 ‘profit’. Wouldn’t they have $800 extra deductions that could offset other taxable income, and not $800 profit?
Seems like an elementary mistake for an REI author to make, but I must be misunderstanding because it isn’t making sense to me.
Perhaps you should tell us which book you are reading, and the author. Someone who has the book can read this example in the complete context in which it is presented. Only then can you get a meaningful response.
For now, here is my comment on the example you have presented. If this property is being held for rental income, then the interest and depreciation are additional expenses which are added to the net operating loss resulting in an increase in the tax loss to $3200. In the 25% tax bracket, and for a taxpayer who is eligible to use this net passive loss to offset other ordinary income, the tax savings will be $800. Not a “profit”, but a tax savings. The property is still a negative cash flow; the tax savings just takes a little of the sting out of it.
The flaw in your analysis is that mortgage interest and depreciation are not income, and therefore, can not offset the net operating loss. To be sure, we need to read the example in the context of its presentation, because, as you have presented this excerpt, it makes no sense.
If you have the ability to scan the chapter and email it to me, I will be in a better position to give you a more definitive response.