Can S-corporation rental income used for mortgage payments be considered business expenses? Tax implications explained

Thanks for the explanation. So to be clear, even though I'm not personally receiving any of the rental income as cash (since it all goes to the mortgage), I'd still have to pay personal income tax on whatever the "paper profit" is after deducting interest and other expenses? That seems rough since I wouldn't actually have that cash to pay the taxes with.

Yes, that's exactly right. The S-Corporation is a pass-through entity, so any profit flows to your personal tax return regardless of whether you take distributions. If your mortgage is $75,000/year but only $40,000 of that is interest (with the rest being principal), and you have another $15,000 in deductible expenses (property taxes, insurance, depreciation, etc.), you'd have $20,000 in taxable income even if you never pocket a penny. This is known as "phantom income" - taxable profit that doesn't result in cash in your pocket. Many real estate investors intentionally structure their properties to minimize this issue, either through larger down payments (reducing the principal-to-interest ratio) or using depreciation strategies to offset the paper profit.

How does taxr.ai handle entity-specific situations? Like I'm curious if it knows the differences between holding properties in an S-Corp vs LLC vs personally? Because my accountant charges me extra every time I ask these kind of "what-if" scenario questions.

Is it actually worth the money though? I've tried other tax tools that claimed to find deductions but they just told me obvious stuff I already knew. Does it actually find things a regular tax software wouldn't catch?

Yes, it absolutely handles entity-specific tax rules. When you upload your documents, you specify the entity type (in your case, S-Corp), and it applies all the relevant tax rules. It actually showed me how differently my rental property would be taxed under various entity structures, which helped me make better decisions about where to hold future properties. Regarding whether it's worth it - absolutely. Unlike general tax software that asks generic questions, taxr.ai specifically analyzed my mortgage statements and found deductions my previous accountant had missed. For example, it correctly identified certain repair expenses that should be fully deductible versus improvements that needed to be depreciated. The entity comparison feature alone saved me way more than what I paid.

How exactly does this work? Like do they have some special access to the IRS or something? Seems kinda sketchy that they can get through when regular people can't.

Yeah right. There's no way they got you through to the IRS that fast. I've been calling for MONTHS about an audit issue with my rental property and can never get through. This sounds like a scam to get people's money when they're desperate for tax help.

It's actually pretty straightforward - they use an automated system that navigates the IRS phone tree and waits on hold for you. When an agent finally comes on the line, you get a call connecting you with that agent. They don't have special access - they're just handling the frustrating waiting process. I was definitely skeptical too. But after wasting entire afternoons on hold and getting disconnected multiple times, I figured it was worth trying. I didn't have to share any sensitive tax info with them - they just did the waiting part and connected me once an agent was actually on the line. All my actual tax discussions were directly with the IRS agent.

Could you explain more about cost segregation? I've heard the term but don't fully understand how it would apply to my S-Corp owned rental property and whether it's worth doing for a standard single-family home.

Cost segregation is basically a way to identify parts of your property that can be depreciated faster than the standard 27.5 years for residential real estate. Instead of treating the entire property as a single asset, you break it down into components. For example, while the building structure is depreciated over 27.5 years, things like carpet, appliances, and landscaping can be depreciated over 5-15 years. This front-loads your depreciation deductions, giving you larger tax shields in the early years when you're dealing with more principal payments. For a single-family home, it might not be worth the cost of a professional study (usually $3,000-5,000), but there are simplified approaches you can use. Larger properties or multi-unit buildings almost always benefit enough to justify the expense. Many investors find the tax savings in the first year alone cover the cost of the study.

From my experience (not a lawyer), both provide good liability protection IF you maintain them properly. The bigger issue is most banks won't loan to an S-Corp for residential property - they usually want personal guarantees anyway which partially defeats the liability protection.

This is really helpful clarification on the self-employment tax angle! I hadn't considered that the S-Corp structure could potentially save me 15.3% on SE taxes. But you mentioned having to pay myself a "reasonable salary" - how does that work if all the rental income is going toward mortgage payments? Would I still be required to take a salary even if the S-Corp has no cash flow after expenses? Also, when you say "documenting that you're a passive investor" - what kind of documentation would satisfy the IRS? I was planning to handle most of the property management myself (screening tenants, collecting rent, coordinating repairs) so I'm wondering if that would automatically make me "active" in their eyes.

Great question about the salary requirement! If you're providing services to the S-Corp (like property management), you're technically required to pay yourself a reasonable salary regardless of cash flow. However, many tax professionals argue that if the rental activity is truly passive investment (minimal services), no salary is required. The challenge is that active property management activities like tenant screening, rent collection, and repair coordination would likely be considered "services" to the corporation, triggering the reasonable salary requirement. This creates a cash flow problem when all rental income goes to mortgage payments. For documentation of passive vs. active status, the IRS looks at factors like: hours spent on the activity, whether you hire property management companies, your level of real estate expertise, and whether rental income is your primary business. If you're doing day-to-day management yourself, it's hard to argue it's passive. This is actually a major reason why many rental property investors choose LLCs over S-Corps - you avoid the salary complications while still getting liability protection. The SE tax savings from an S-Corp often get eaten up by payroll processing costs and the administrative burden of maintaining corporate formalities.