For several reasons, the actual net cash flow generated by a rental property investment is different than the amount of income the owner must report for federal income tax purposes. First and foremost, a deduction for depreciation is allowed in the calculation of taxable income from annual operations; however, the owner does not “write a check” for depreciation on an annual basis.  This reduces taxable income relative to the actual cash flow.  The same is true for amortized financing expenses.  Conversely, the owner often does make mortgage payments that include both interest and principal amortization.  However, only the interest portion of the mortgage payment is tax deductible.  The principal portion is, therefore, a cash outflow that is not tax deductible.