Taxable Income

Taxable income is gross income less allowable deductions, the amount income tax is charged on. For a rental, taxable income is NOI less mortgage interest and depreciation. It is often far lower than NOI, and in the early years of a loan it can be negative.

On the default house with a $375,000 loan at 7.25%, NOI of $28,892 less about $27,068 of first-year interest and $14,545 of depreciation leaves taxable income of about negative $12,700.

Whether that loss offsets other income depends on passive activity rules, the owner's income and whether they qualify as a real estate professional. That is a question for a tax advisor. NOI is unaffected by any of it, which is why it is the figure used to value and compare properties.