Taxable income

Taxable income is often different from cash flow. Money set aside for future repairs (reserves) is not tax-deductible; it is still considered income in the year it is collected. Mortgage interest is fully deductible as a business expense. Straight-line Method Depreciation is the investor's biggest tax shelter. The IRS allows the investor to deduct a portion of the building’s cost every year (27.5 years for residential, 39 years for commercial) as an expense, even though the building is likely going up in value. This lowers taxable income significantly.Depreciation is a tax deduction that doesn’t require you to spend cash. You can deduct it based on the full value of the property’s improvements—even the part you financed with a loan. This makes real estate a tax shelter because depreciation reduces taxable income and can even create a tax loss.