BiggerPockets

Michael Rogers of Chandler Properties provided the following Excel Worksheet for BiggerPockets to share with all of our members.

REI Property Analyzer

We hope you all find it comes in handy.

NOTE: If anyone else has their own worksheet that they'd like to share, please get in touch.

Thanks Josh! This is just what the Doctor ordered.

I'm glad everyone is finding it helpful.

Depreciation is a phantom deduction, it does not reduce your cash flow.

Barry,

I think there is a better explanation.

Depreciation expense is how the IRS lets you recover the cost of the building that is supposedly wasting away. The depreciation expense is the IRS allowance for the portion of the building's value that has been eroded through use in a rental activity.

The depreciation expense is not an actual out of pocket expense, but it still offsets my net rental income making my taxable rental income even lower. lf the depreciation expense is greater than my net rental income, then I have net rental loss for tax purposes, even though the property may have generated a positive cash flow.

Provided I meet the income limitations, I am allowed to use my net passive losses to reduce the amount of income tax I might have to otherwise pay on my other ordinary income. If I don't meet the income limitations, I can save the net rental loss for next year and try again or wait until the property is sold to claim my net rental losses.

I had a question of my own concerning this worksheet. What is the purpose of adding back the principal payments and why does it affect taxable net income? Does this change year by year depending on how much each mortgage payment is contributing to paying down the principal?

Originally posted by Barry Robbins

When you say you can "save them for next year and try again", do you mean by attempting to adjust your gross income to meet the requirements? If so, do the previous years combine to give you the total benefits that you would have received had you been eligible from the get go? Thanks.

The "them" I referred to seemed vague when I reread my post so I edited it for clarity. I am talking about the net rental loss that you could not use to reduce your other ordinary income because your income was too high.

Rental loss is a passive loss As a general rule, you can only use passive losses to offset passive income. The one exception to this rule is called a "net passive loss allowance". When your passive loss is from a real estate rental activity in which you actively participate, the IRS will allow you to use up to $25K in net rental losses to offset other ordinary (active) income, subject to income limitations.

If you have a net passive loss that you can not use, the loss is suspended and carried forward to the next tax year, where is it used to offset rental income, income from other passive income activities, and lastly other ordinary income if allowed within the income limits.

If you sell the property, any suspended passive losses can be taken in full without regard to the net passive loss allowance income limitations.

Did this help?

Michael backs out the principal contribution because it is not a deductible expense on your tax return. You have to pay it if you have an amortizing mortgage loan, and it does reduce your cash flow, but it is not counted as a deduction when computing your taxable rental income.

If you look closely at Michael's spreadsheet formulas, you may notice that the amount of principal he backs out is understated, making the taxable rental income slightly lower than it really is, or a taxable rental loss slightly higher than it really is.

This is not really a problem for a quick and dirty cash flow analysis because the number that is really important to you is the net cash flow before taxes. That number for a property you might be thinking about buying needs to be in your "ball park" of acceptable cash flow for you to even proceed further.

Yes, the principal portion of your amortizing loan annual debt service will change each year, as will most of the expenses you are allowed. Property taxes, insurance premiums, repair costs usually increase each year, but hopefully your rental income increased faster.

What a great tool! Thanks Michael and Joshua.

Thanks for the spreadsheet. It is very helpful.

I tried to put my number in. It did not work so well in my situation.i have second mortgage.