I want to calculate the potential monthly income that I would receive from buying and renting properties.
Example: If the income is $250 a month - should I reduce that number according to my income tax rate?
OR is it standard to just assume that deductions will reduce the taxes to almost nothing?
P.S. I know I can consult a CPA about this, but I'm more curious about whether folks generally reduce their expected income according to income tax, or just assume deductions will cancel it out and don't include it in the estimates.
@Nick Akey Welcome to BP! I do not do that and don't imagine that many would; it would be way too complicated considering expense deductions etc. All the best!
I would not factor in income tax to your consideration.
Taxes are important but not when deciding on an investment property.
@Nick Akey probably not necessary at this time. You could estimate your annual depreciation to see if that would wipe out any net taxable profit from the rental. When doing so, be sure to do an appropriate allocation between building and land. Land is not depreciable. Remember, only the interest portion of a mortgage is deductible, so be sure not to deduct your entire mortgage payment when coming up with an estimated taxable net income.
It isn't terribly helpful for evaluating A vs B investment property decisions. Could help in determining if you actually like your investing model in the first place. Maybe you will find that after taxes, there is not enough cashflow and you want to save for a larger deal.
For instance if you are at a marginal rate of 45% state and local, then your $250/month becomes $162.5. But then depreciation comes in and may increase that a bit.
The other thing is with a mortgage, you are paying down principal at a similar rate to the depreciation. So on a cashflow basis they tend to wash.
Probably more important than cashflow is trying to determine what the potential of the investment is on a 5-10 year timeline. So all cashflow, all principal pay down, all potential appreciation.
No. While taxes are a percentage, you are comparing cash flow from two properties to find the better one. Doesn't matter if you are factoring in your income taxes or not. It will only make it more complicated.
@Nick Akey the only thing I’m really concerned about is how much income one investment makes vs another since cash-flow made on either will be taxed at my ordinary tax rate (ie the same). However, a more expensive property in the same area making the same income as another property will shield more income from taxes due to a higher allowable depreciation write off. This is a moot point though since presumably if you could make the same income from a more expensive (ie nicer) property you would naturally choose that asset over the other anyways. And as a side note, imo the quality/desirability of the asset is your greatest protection in the buy and hold model so buy the most desirable assets you can make money on!
That’s overkill. That’s like interviewing for jobs and trying to compare them by their after tax / take home pay values instead of their gross pay value...