Question

Compute the cash flow, tax flow, and after tax flow for the following real estate investment property:

-Gross rents are expected to be $36,000 per year

-Expected vacancy allowance is 5% of gross rents

-Property management fees are 8% of rents collected

-Total estimated operating expenses per year $7,200

-Payment of mortgage per year:

Interest 12,000

Principal 3,000

Total 15,000

-Depreciation allowance for the year is $14,350

-The owner's earned income is $100,000 and his marginal tax bracket is 30%

Compute the following:

A) Before tax cash flow

B) Tax flow (taxable income or loss from property annual operation)

C) Income taxes due or tax savings from annual operation of this investment property

D) Annual after tax cash flow from the property

Answer 1

A) Before tax cash flow = Gross rent - Vacancy allowance @ 5% of gross rent - Management fee @ 8% of net collected - Operating expenses - Payment of mortgage (interest and principal) + Earned income

Before tax caah flow = $36,000 - ($36,000 * 5%) - ($36,000 * 95% * 8%) - $7,200 - $15,000 + $1,00,000

Before tax cash flow = $36,000 - $1800 - $2736 -$7,200 - $15,000 = $1,09,264

B) Taxable income = Before tax cash flow + Principal payment of mortgage - Depriciation

Taxable income = $1,09,264 + $3,000 - 14,350= $97,914

C) Income tax due = Taxable income * Tax rate = $97,914 * 30% = $29,374.20

D) Annual after tax cash flow = Before tax cash flow - Income tax due = $1,09,264 - $29,374.20