Tax Deduction

A tax deduction is a cost you are allowed to take off income, so less of it is taxed. For rental owners, nearly every operating expense in NOI is deductible, along with mortgage interest and depreciation. Principal payments and capital improvements are not deducted in the year they are paid.

The $16,708 of operating expenses on the default house are generally deductible in the year they are incurred. The owner can also deduct first-year interest, about $27,000 on a $375,000 loan at 7.25%, plus $14,545 of depreciation.

Deductibility does not change NOI. It changes how much of the NOI the owner keeps after tax. Improvements that extend a property's life, like a new roof, are capitalized and depreciated over time rather than deducted at once. Rules differ by situation, so treat this as a general outline.