Checklist for projecting taxable income
1. Taxable income (loss) schedule
- Compile a comprehensive income statement for the property, detailing rental income and other revenue streams.
- Subtract allowable deductions such as operating expenses, property management fees, repairs, and utilities to determine the property’s net operating income (NOI).
- Include interest paid on any loans associated with the property.
Formula
1.1. Interest calculation
- Record interest expenses on mortgages, loans, and other forms of debt related to the property.
- Calculate the deductible interest by referencing applicable tax laws and regulations.
Formula
1.2. Depreciation
- Determine the appropriate depreciation method (e.g., straight-line or accelerated) for the property.
- Calculate depreciation for the property and any eligible components.
Formula for Straight-line depreciation
Formula for Accelerated depreciation
2. Amortization of closing costs
- List all closing costs associated with property acquisition.
- Determine which closing costs can be amortized over time for tax purposes.
- Amortize eligible closing costs over the applicable time frame according to tax regulations.
Formula
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3. Amortization of points on the permanent mortgage
- Identify any points paid at the time of securing a permanent mortgage.
- Determine if points can be deducted or amortized over the life of the loan.
- Calculate the amortization schedule for points, if applicable.
Formula
4. Amortization of leasing commissions
- Keep track of leasing commissions paid to secure tenants.
- Determine whether leasing commissions can be deducted immediately or amortized over the lease term.
- Apply the appropriate amortization method to calculate deductible leasing commissions.
Formula
5. Capital expenditures/Tenant improvement depreciation
- Identify capital expenditures and tenant improvements made to the property.
- Classify these expenses as either immediate deductions or depreciable assets.
- Calculate the depreciation for depreciable assets using the appropriate method.
Formula
6. Projecting taxable income on sale
6.1. Adjusted cost basis
- Determine the adjusted cost basis of the property, including the original purchase price, improvements, and allowable adjustments.
- Exclude costs that have been previously deducted or amortized.
Formula
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6.2. Capital gain
- Estimate the property’s fair market value at the time of sale.
- Calculate the capital gain by subtracting the adjusted cost basis from the sale price.
Formula
6.3. Taxes due on the resale
- Calculate capital gains taxes based on the capital gain and the applicable tax rate.
- Consider any relevant tax exemptions or deferrals that might apply.
Formula
7. After-tax equity reversion:
The after-tax equity reversion is figured by subtracting the mortgage balance and the taxes due on the sale from the net sales price.
7.1. Profit
- Calculate the net profit from the property investment after considering all income, expenses, and taxes.
- Factor in the impact of any financing or leverage used in the investment.
Formula:
