What is After Tax Cash Flow?
The After Tax Cash Flow is the residual income generated by a real estate property investment once tax obligations have been fulfilled.
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How to Calculate After Tax Cash Flow?
The after-tax cash flow is the income left over after taxes have been paid.
In commercial real estate (CRE) investing, the after-tax cash flow is a metric that measures the remaining income once a property’s operating expenses, debt service obligations, and income taxes (IRS) have been fulfilled.
The after-tax cash flow of a property investment can be categorized as an indicator of profitability, since the metric measures the discretionary income remaining after the annual income tax liability has been satisfied.
Therefore, the after-tax cash flow is determined by calculating the taxable income of a real estate property, and then subtracting the annual income tax provision.
The residual cash flow belongs to the real estate investor, since the obligations owed to third parties, such as the taxes owed to the Internal Revenue Service (IRS), have been met.
While the jurisdiction of the property and surrounding details can cause the tax obligation to shift, most taxpayers are permitted to apply certain deductions to their taxable income, most often mortgage interest payments and depreciation.
The process of calculating the after-tax cash flow metric is a three-step process:
- Compute Taxable Income → The first step is to calculate the property’s taxable income in the current period. The taxable income equals the property’s net operating income (NOI) minus interest expense owed on financial borrowings, depreciation allowance, and amortized loan costs.
- Determine Tax Liability → Once the appropriate adjustments have been applied, the next step is to multiply the taxable income by the marginal tax rate, resulting in the tax liability for the given period.
- Calculate After Tax Cash Flow → In the final step, the tax liability is subtracted from the taxable income of the property to arrive at the after-tax cash flow.
After Tax Cash Flow Formula
The formula to calculate the after tax cash flow is as follows.
Where:
- Net Operating Income (NOI) = (Rental Income + Ancillary Income) – Direct Operating Expenses
- Annual Debt Service = Σ Current Principal Amortization + Interest Expense
- Income Tax = Marginal Tax Rate (%) × (NOI – Annual Debt Service)
