How to Compute Cash Flow and Sales Proceeds Before and After Taxes

The primary purpose real estate investors own income property is to make money; favorably from a steady stream of cash flow generated by the property on a monthly basis as well as a lump sum profit when the property gets sold sometime in the future.

This is the explanation for real estate investing. To buy investment real estate with an "income stream" that regularly generates more rental income than operating expenses and debt service, and to collect sizable proceeds due to the property's appreciation in value upon sale.

Fair enough. But real estate investors consider more than these cash flows and proceeds before taxes. They are also concerned how much they can expect to collect after they pay federal income taxes.

In this article, we'll look at both so you will have an understanding of how they are computed in a real estate analysis.

In essence, both work the same way. The revenue investors collect prior to income taxes is known as the "before tax" (BT) revenue, and the amount of revenue an investor actually can keep after settling up with the IRS is called the "after tax" (AT) revenue.

Cash Flows

Cash flow before tax (CFBT) is rental income less operating expenses less debt service (i.e., the mortgage payment) less any non-funded capital additions.

Rental Income

less Operating Expenses

less Debt Service

less Non-funded Capital Additions

= CFBT

Cash flow after taxes (CFAT) is derived by computing tax liability based upon taxable income and then subtracting that amount from CFBT. Okay, so let's break it down.

Taxable income is net operating income (rental income less operating expenses), less the mortgage interest expense and amortized points, less depreciation. It should also be noted that any interest earned by the investor due to the property's revenue would in turn be added (which we'll ignore for our illustration).

Net Operating Income

less Interest Expense

less Amortized Points

less Depreciation (real property and capital additions)

= Taxable Income

Tax liability is taxable income multiplied by the investor's marginal tax rate (combined federal and state income tax rates). In this case, when the taxable income is a positive amount there would be a tax liability, whereas when it is a negative amount there would be a tax savings. In other words, if income is earned after allowable tax deductions, the investor will have to pay taxes and therefore has a tax liability; if no income is earned, the investor can deduct a loss from his or her income taxes and therefore has a tax savings.

Taxable Income

x Marginal Tax Rate

= Tax Liability (or savings)

The final computation,

CFBT

less Tax Liability

= CFAT

Or,

CFBT

plus Tax Savings

= CFAT

Sales Proceeds

This is the amount the seller can expect to receive once the property is sold.

Sales proceeds before tax virtually represent the dollar amount the seller will collect from escrow at closing. It is the sale price of the property less cost of sale less loan repayment (i.e., balance remaining on the existing loans).

Sale Price

less Cost of Sale

less Loan Repayment

= Sales Proceeds (BT)

Sales proceeds after tax are the sales proceeds before tax less the taxes the investor must pay the IRS due to a sale of the rental income property.

Sale Proceeds (BT)

less Taxes Due to Sale

= Sales Proceeds (AT)

Taxes due to sale is a combination of the recapture tax (or Cost Recovery Recapture) and the capital gains tax less tax savings due to unamortized loan points multiplied by the investor's marginal tax rate.

About the Author

James Kobzeff is the developer of ProAPOD. A leading provider of real estate investor software solutions since 2000. Create cash flow, rates of return, and profitability analysis presentations to evaluate any-size investment opportunity in minutes! Easy and affordable. Learn more at =>www.proapod.com

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IRS Tax Debt - Even Government Employees Can Lose Their Jobs Due to Their Tax Debt

The Few: Government jobs are hard to get. There's a waiting list a mile long. But when you finally land that job, you have to be careful. Did you know being in debt to the IRS can actually make you lose your job? Then you'll be broke and still be in debt. If you work for the government, watch out. This scenario could easily happen to you.

What They'll Do:

Bank Levy: This is a common way the IRS collects their money. Ignore the IRS's "Final Notice and Intent to Levy," and the IRS might seize the money you owe right out of your bank account. In one fatal swoop, all the money you've saved up for years could be gone.

Wage Garnishment: This is a bigger danger to you and your job. The IRS has to notify your place of employment when they decide to garnish your wages. If you fall into the category of people that cannot be in debt to a government entity, this could cause you to lose your job. Although usually, you'll get a limited amount of time to resolve the debt, first.

Don't Delay! You can't lose your job. So you need to know how to remove an IRS debt, and quickly! But nothing with the IRS can go fast. Especially when you're not a professional. Remember, you're dealing with people who are skilled and trained in IRS procedure. But here are some methods for beating your debt.

Installment Agreement: Try paying monthly. Everyone has the right to apply for this program. The IRS will need to know your full and complete financial information. They will compare that to the amount of money you spent on your basic needs. Then they will determine how much you will pay them each month. This may sound a bit like how you pay your credit card debts, but it's not the same. With your credit card debts, you choose how much you pay each month. But with the IRS, They choose how much you pay each month. And if you default, you will be disqualified from the plan! So you cannot miss even one payment.

Offer in Compromise: Good luck winning this! You do have the option to settle your debt. But don't even bother to try to submit and Offer if your financial situation isn't dire. The IRS will again, check your entire financial situation. If they find you have no assets and absolutely no way to pay your debt in full, they will consider an Offer. The IRS approves only around 2% of the people that apply. So make sure you don't make any small mistakes while filling out the 44 page document.

Getting Lucky: If you take care of your IRS debt before they find you, you'll be one of the lucky ones. For many people out there, it's already too late. Work on your debt now, before the IRS makes you lose your job and your money.

Now You Have The Smoking Gun...Use it!

Richard Close was an IRS-Hitman. He worked as a revenue officer for the IRS and his father was the head of the collections branch for 30 years; so it runs in the family. He left that behind and now he's partnered with Tax Defense Network to help thousands of Americans with their tax problems. He gives the tips and tricks for you to fight the IRS and win! Visit him at: http://irs-hitman.blogspot.com orhttp://www.taxdefensenetwork.com or contact: email irs-hitman@taxdefensenetwork.com or 1-888-248-9058.

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Concepts To Consider When You Can't Pay Your Taxes

Not paying your taxes on time entails various consequences. If you are having trouble paying your taxes in full, don't let it hinder you in filing your tax return timely. Consider paying as large a percentage of the amount owed or borrow money from others in order to settle your tax liability in full. Filing a return and not including full payment can save you large amounts of penalties and fees. Moreover, payment plans are available and being on a current payment plans avoids IRS collection process which may include, property seizures, garnishments etc. Most CPA firms can advise you on these matters.

These are the ordinary penalties:

· "Filing Failure" penalty

5% per month on the amount of tax due on the return to a maximum of 25%

· "Payment Failure" penalty

.5% per month on the amount of your tax due on the return to a maximum of 25%

· Both "Filing Failure" penalty and "Payment Failure" penalty apply

The "Filing Failure" penalty lowers to 4.5% per month and "Payment Failure" penalty is

.5% per month. The combined penalty stays at 5%. The maximum penalty for both is 25%. Then, the "Payment Failure" penalty continues at.5% per month another 45 more months. Both penalties can go to a maximum of 47.5%.

Besides the penalties above, interest is charged on late payments. Also when you are self-employed, you take full responsibility for paying the taxes as money is earned through the year.

Payment extensions are provided when it can be proven that unwarranted hardship exists. Inconvenience caused by paying the tax isn't enough grounds for unwarranted hardship. The taxpayer must show that paying the tax would cause significant difficulty and/or expense. For example, a fire sale, selling property at an extremely discounted price, since the person faces the difficulty of paying taxes.

When a payment extension is granted, interest is still charged but the "Payment Failure" penalty is waived. The payment extension is usually good for six months from the due date of the return. The IRS will lengthen time allowed for a payment extension due to some circumstances..

To apply for a payment extension use Form 1127. Form 1127 requires a taxpayer to provide detailed statements of; assets and liabilities, statement income for each of the 3 months prior to the due date of the tax return and statement expenses for each of the 3 months prior to the due date of the tax return.

Paying Income Taxes With Borrowed Funds

Borrowing money to settle tax obligations is an option. Here are some various scenarios:

· Loan From Individuals

Borrow from relatives or friends. Interest rates are probably lower.

· Loans From Banks Or Other Commercial Institutions

Interest on this type of loan is usually considered a non-deductible personal interest expense. Typically a financially troubled taxpayer has a hard time to qualify for this type of loan.

· Home Equity Loan

Interest rates may be lower than with other types of loans. The interest payments may be tax-deductible. This is usually the cheapest option.

· Credit Card

There are a number of companies approved to accept credit cards or debit cards to pay income tax. Note, interest charges may be high and is usually considered a non-deductible personal interest expense. On top of this interest, the companies approved to accept credit cards or debit cards to pay income tax charge a service fee.

Monthly Payment Agreement Request

File form 9465 to apply for a monthly payment agreement with IRS, this can be done online at WWW.IRS.GOV. This process can be done after a hardship extension expires. Form 9465 requires less information than Form 1127 regarding the hardship extension. No financial statements are required if tax due is under $50,000.

When the amount owed is more than $50,000 Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals is required. This form helps the IRS obtain detailed, information about you. Consider consulting a CPA Firm about allowable expenses and national living standards that correspond to Form 433-A.

There is a fee for the monthly payment agreement and it is deducted from the first payment if the request is approved. When the payment agreement request is approved, interest on any tax due date is still imposed. However the "Payment Failure" penalty is reduced to.25 % instead of.5% if the return is timely filed.

The monthly payment agreement has a fee of $120. The fee is reduced to $52 when a person permits the IRS auto debit from their account. In the event the taxpayer qualifies as a low-income the fee is reduced to $43.

Monthly Payment Agreements may be terminated if IRS thinks the probability of obtaining payments are at risk. The IRS will also terminate a monthly payment agreement if the financial information supplied was not accurate or complete.

Other reasons for terminating the agreement are the following:

• Failing to make a monthly payment.

• Failing to pay another tax liability when it's due.

• Failing to provide updated financial information.

• IRS finds out that your financial condition has improved.

A written notice will be sent by the IRS 30 days prior to changing or terminating a monthly payment agreement. IRS will also provide the grounds for changing or terminating a monthly payment agreement. The requirement for written notice does not apply when the IRS believes the collection of tax owed is at risk.

Thus, it is very important that tax returns are filed properly even if full payment cannot be made. Options like hardships extensions or monthly payment agreements may be availed to prevent further charges, penalties and other serious consequences.

We hope this article was helpful. This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation.

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We can help deal with the IRS and paying your taxes. Accountant Pompano Beach here to help!

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