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.