You're taxed on net rental income, not gross rent, and depreciation often shelters most of what's left. Start with the deductions. Against the rent you collect, you can write off: - Property taxes and insurance - Mortgage interest (the interest portion only; the principal you pay down is not deductible) - Related costs like travel to an out-of-area property and the auto expenses that go with it Because principal isn't deductible, a property that runs, say, $200 a month negative in real cash flow can still show positive taxable income on paper. Then depreciation goes to work. Under IRS rules, the structure (never the land) depreciates over 27.5 years for residential rental property, which creates a sizable paper deduction every year. As an illustration only: a property with land valued around $100,000 and a structure valued around $275,000 throws off roughly $10,000 a year in depreciation, often enough to erase the taxable income from a modestly cash-flowing rental. One of our own rentals brings in a few hundred dollars a month and shows little or no taxable income once the year's depreciation is applied. The rules and thresholds change and depend on your situation, so work with a CPA who specializes in real estate investor taxation. Real estate investment clubs are a good place to find one. Treat everything above as the shape of the benefit, never a promise.