How to Compute a Rental Property's Cash Flow After Taxes
Whether you're an income property investor or a real estate agent who services rental income properties, it's important to understand what cash flow after taxes is and how to calculate it. For not unlike the other measurements associated with income-producing property, without knowing the meaning and formulas, you're really just guessing whether or not a property is a good investment.
It seemed needful, therefore, to expain how to compute cash flow after taxes (or CFAT) for those of you new to real estate investing who want to learn.
Cash flow after tax (CFAT) is the amount of money produced by the investment that is available to the real estate investor after the IRS has been satisfied. In other words, it represents the amount of spendable cash generated by the property the invesor can pocket after he or she pays their annual income tax.
CFAT requires the following three computations.
Note: The income property's financial data (e.g., cashflow before taxes, net operating income, debt service) as well as the tax matters (e.g., loan interest, depreciation allowance, amortized loan costs, owner's tax rate) must be determined beforehand.
1. Compute taxable income:
- Net operating income
- - Interest paid on the loan
- - Depreciation allowance
- - Amortized loan costs
- = Taxable Income
2. Compute income tax liability:
- Taxable income
- x Investor's tax rate
- = Income Tax Liability
3. Compute CFAT:
- Cash flow before taxes
- - Income Tax Liability
- = Cash Flow After Tax
The following video illustrates how to calculate cash flow after taxes based upon an example scenario. Watch video...
So You Know
ProAPOD Executive 10 investment software and the Pro RE Calculator online real estate calculator both automatically compute all the required calculations to derive cash flow before taxes. You simply fill in the appropriate forms.