The only way that works is if the dollar value of the deduction for non-cash expense (depreciation) exceeds the the difference between cash expenses and the dollar value of the deductions for cash expenses.
Say cash expenses per month are $4,500, and tax rate is 33% (unrealistically high but easy to calculate), the dollar value of the deductions is $1,500, reducing the actual after-tax monthly outlay to $3,000 versus $2,000 cash received.
The monthly depreciation expense on the townhouse (which does not include value of land) would have to be $3,000 (which with a 33% rate results in dollar value of deduction equalling $1,000 per month) for owner to break even (that's depreciation of 36k per year).
The depreciation is 25 year straight line if I remember correctly, which means depreciation deduction is actually about 16k per year, with a dollar value of deduction at around $5,300 per year, or about $500 per month. [actual depreciation deduction is lower as you can't depreciate the land]
These kinds of things worked a lot better when there was accelerated depreciation available.
Cash expenses never produce a net after-tax benefit because the rate of taxation cannot exceed 100%.
The after-tax loss would be reduced by the value of the NOL, let's say he's down $750 per month after-tax, the actual loss would be $500. |
