Quantifying After-Tax Cash-Flow (ATCF)

The methodology behind figuring out the After-Tax cash flow (ATCF) is to take your Before-Tax Cash-Flow (BTCF) and add to/subtract from it your tax savings/ tax liability. Here are the steps:

Taxable Income = Net Operating Income (NOI) – Annual Interest Payments – Cost Recovery

See below for Cost Recovery (a.k.a. depreciation) calculation.

Tax Impact = Taxable Income X Investor’s tax bracket

If Tax Impact is negative it is a Tax Savings, i.e. savings will be added to your income

If positive it is a Tax Liability, i.e. reduces your income by that much

ATCF = BTCF +- Tax Impact (add tax savings, subtract tax liability)

BTCF, NOI were explained in another post

For example, say, annually

NOI = 7,500

Interest payments = 7,100

Cost Recovery = 2,727

BTCF = 1,100

Tax bracket = 28%

Taxable Income = -2,327 (7,500-7,100-2,727)

Tax Impact = -652 (-2,327X.28) This is a tax savings increasing the income by that much.

ATCF = 1,152 (1,100+652)

Cost Recovery = Improvement Value/27.5 years (for residential, 39 for commercial)

More on Cost Recovery in another post.