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Deduct predictable expenses paid by the a/b which are necessary for the production or collection of income. Allowable expenses include but are not limited to the following: a. The interest portion of a mortgage payment, b. Property taxes, c. Insurance, d. Maintenance, e. Utility costs paid by the a/b, f. Labor costs, g. Real estate agent’s fees, h. Sales taxes, i. Advertising for tenants, j. Verified transportation costs related to a rental property operation, k. Interest payments on loans for equipment necessary to produce the rental income. 4. Non-allowable Expenses Do not deduct the following expenses from rental income: a. Expenses paid by a third party unless reimbursed by the a/b. b. The principal portion of a mortgage payment. (The principal is deducted from the CMV as an encumbrance.) c. A capital expenditure. This is an expense for an addition to or increase in the value of the property and is subject to depreciation for tax purposes (e.g., principal portion of mortgage payment, additions to existing structure). d. The property depreciation amount claimed as a federal income tax deduction. e. Replacement of an existing feature of the property which could have been repaired. (e.g., furnace could be repaired but is replaced with new heating system). f. Replacement of an existing feature of the property which could not be repaired with one that is greater in value (e.g., replacement of shingle roof with brick tile roof) which results in improvement and increases the value of the property. 5. Calculate Net Annual Income. Subtract gross allowable operational expenses from gross annual income. DO NOT ROUND! 57