Q: How was rental income in Schedule E / Part I calculated?
A: Even though the Schedule E / Part I rental properties suffered a $50,212 loss, Schumacher had to report $000 since a passive loss, such as this one, can only be used to offset passive income. Schumacher had no passive income. Therefore, Schedule E / Part 1 reports zero taxable income – rather than a $50,212 loss – from his rental properties.
The $28,102 of cash rental income reported in the “Cash” column for Part I rental income is the amount of cash from rental properties after the deduction for $53,676 of mortgage interest expense and $24,638 for depreciation expense. Mortgage interest expense and mortgage payments are addressed separately in the Personal Debt Service section of the personal cash flow statement. Depreciation expense is removed since it is a non-cash amount.
Course overview: Guarantor Analysis, Global Cash Flow, and the Second Way Out