"Is this rental profitable?" has several different answers, depending on whether you mean cash in your pocket this month, taxable profit on your tax return, or your total gain over many years. This article separates them with one example. It is general education based on IRS Publications 527 and 925 (2025 editions at the time of writing); tax rules change and your situation is specific, so confirm current rules at irs.gov or with a tax professional.
Total monthly costs are $1,564 + $168 + $126 + $105 + $60 = $2,023. Cash flow is $2,100 - $2,023 = $77 a month, or $924 a year. This is the number the calculator reports.
Part of every mortgage payment reduces the loan. In the first year of this loan, about $2,146 goes to principal and about $12,417 to interest. The principal is not a cost in the cash flow calculation, yet it is real value: your loan balance falls. Adding it to cash flow gives about $3,070 of first-year benefit, before any change in the property's value. Paying down principal is not cash in hand; you only receive it when you sell or refinance.
Taxes use different rules. According to IRS Publication 527, residential rental property placed in service is generally depreciated over 27.5 years using the straight-line method and a mid-month convention, you cannot depreciate land, and depreciation begins when the property is ready and available for rent. Suppose 20% of the price ($48,000) is land, which is an assumption for illustration only; the actual split should come from your records, an appraisal, or tax assessor information. The building basis is $192,000, so a full year of depreciation is $192,000 / 27.5 = about $6,982 (the first and last years are partial).
Here is a simplified annual picture. Only actual expenses are used, not budget reserves, and the loan's interest is used, not its principal:
| Rent collected (assuming no vacancy) | $25,200 |
| Property taxes and insurance | -$4,200 |
| Mortgage interest | -$12,417 |
| Management | -$2,016 |
| Repairs and maintenance (assumed spent) | -$1,512 |
| Other costs | -$720 |
| Depreciation | -$6,982 |
| Taxable result on paper | -$2,647 |
So the same property can show positive cash flow of $924 and a loss of $2,647 on paper. Depreciation is a deduction that does not require a cash payment. It also is not permanent: when a property is sold, depreciation previously claimed can affect the tax owed, so talk to a tax professional before relying on it in a purchase decision.
Not automatically. IRS Publication 925 explains that a rental activity is generally a passive activity, and that a passive activity loss is generally not allowed in the year it occurs. There is a special allowance of up to $25,000 for people who actively participate in rental real estate, but it is reduced by 50% of modified adjusted gross income above $100,000 and generally disappears at $150,000. Active participation is a lower bar than material participation; owning at least 10% and making management decisions such as approving tenants or setting rent terms is the type of involvement the IRS describes. Rules for real estate professionals differ. Losses that cannot be used now are generally carried forward. Check the current edition for your tax year.
Total return adds appreciation (or decline) in the property's value, which nobody can predict, and subtracts selling costs and taxes when you sell. It also depends on how much cash you invested up front, including down payment and closing costs, which our calculator does not request.
Start with cash flow, then bring the rest to a tax professional with your real numbers.
Why is cash flow so much smaller than the taxes saved? They measure different things. Cash flow is money moving through your accounts; taxable income is an accounting result under tax rules.
Do these numbers apply to my state? The IRS rules cited here are federal. States can treat rental income and losses differently, and property taxes and insurance vary widely by location.
Where can I read the rules myself? IRS Publication 527 (Residential Rental Property) and Publication 925 (Passive Activity and At-Risk Rules) are free at irs.gov.