Income Taxes Impact on Rental Property Evaluation

5 Replies

Greetings,

I am using the BP Rental Calculator help me evaluate potential rental properties, and attempting to be as accurate as possible.  I like the fact that it accounts for so many potential expenses.  One big expense that I do not think is accounted for is income taxes.  How do you account for this expense when evaluating an income property?  Considering depreciation, and expenses, it may be a lower percentage than W2 income, but still a significant portion of the profit will go to state and federal taxes.  Do you use 10%, 15% more or less?  Do you consider income tax expenses as part of your cash flow evaluation when screen properties?

Thank you for your feedback,

Paul

Usually it isn't included in analysis because it can be unpredictable.  I assume you are referencing out of state taxes because you are in CA which shouldn't be a big deal because CA will be higher than everyone else and you can deduct other states taxes from your CA taxes in the form of a credit.

@Paul Post

It is not included because everyone's tax scenario is different. 
One investor may be in the top bracket while another investor may be in the 15% tax bracket.
One investor may live in a high tax state like California while another investor can live in a state that does not charge an income tax.

Furthermore, the good thing about investing in real estate is that you can have cash-flow but show a tax-loss which will overall reduce your tax liability.

I'm asking about income tax on the cash flow, not property taxes.  We get hit with both Federal and State income taxes and g if it is significant. I agree there are write offs such as depreciation and expenses, but I'm just wondering if anyone figures that expense into their cash flow expectations from a rental property, and if so how they estimate the amount to deduct from the profit.

I completely agree with you Basit, but I still believe it would improve the tool if it allowed us to input a percentage amount for both state and federal income taxes.  It could allow 0% or a negative % if that’s what someone expected.

I've been thinking about this too @Paul Post .  The calculators could show depreciation and the interest part of a loan as expenses against the rental income, as well as the % we already input for Repairs.  Then if there was a field for estimated tax bracket or whatever, the calculator should be able to account for the taxes on what is left of positive rental income if expenses don't account for it all.

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