PSI Oklahoma Real Estate Practice Test

How is taxable income from an investment property estimated?

1. Gross income plus expenses

2. Net income minus interest and depreciation

3. Net income divided by total investments

4. Gross income minus property taxes

The correct answer is: Net income minus interest and depreciation

Estimating taxable income from an investment property involves taking the net income generated from that property and adjusting it for certain expenses, primarily interest on any loans and depreciation. When evaluating total taxable income, the net income represents the revenues generated by the property after subtracting operating expenses from gross income. However, to arrive at the taxable income figure, it's crucial to consider additional deductions that are allowed by tax regulations. Interest payments on loans used to finance the property are deductible, as is the depreciation, which accounts for the gradual loss of value of the property over time. Including these deductions allows investors to determine a more accurate financial picture of their earnings from real estate, reflecting a realistic obligation to pay taxes. As a result, the correct approach for estimating taxable income includes subtracting interest and depreciation from the net income rather than just looking at gross income or other methods that overlook these significant expenses.