Pre-Tax vs After-Tax cashflow for investment properties

Hi all,

Just wondering if the following scenarios are possible regarding investment property cashflow.

* If the pre-tax cashflow is a negative value such as -$10,000, is possible for the after-tax cashflow to be an even more negative value such as -$12,000 based on taking into account only the tax-impacted components such as interest and depreciation?
* Similar to above, if the pre-tax cashflow is a positive value such as $2,000, is it possible for the after-tax cashflow to be an even bigger positive value such as $5,000 by taking into account just the tax-impacted components such as interest and depreciation?

See 3 examples below - can you let me know if this is correct? For each example, assume the data is for a particular financial year. In all cases lets assume income tax rate for the investor is 47% tax rate.

EXAMPLE 1 (using interest-only loan)
- Lets assume Rental Income=23000, Expenses (e.g. strata, water, council)=7000, Loan Repayments (interest only loan) = 14000, Interest part of loan=14000, and Depreciation=12000
- Before-tax cashflow based on above = 2000
- Now we take Rental Income of 23000 and deduct the above expenses, interest, and deduction amounts for the year, which gives us -10,000
- We take 10,000 and we multiply this by the tax rate of 0.45, which gives us 4500
- Above means that I get 4500 as my tax return, which will be $+4500 tax impact
- Now we get the Before-Tax cashflow of 2000 and ADD 4500 to it, which gives us $6500 for the after-tax cashflow - is this correct?

EXAMPLE 2
- Lets assume Rental Income=25000, Expenses (e.g. strata, water, council)=15000, Loan Repayments (inc Principal AND Interest) = 22000, Interest part of loan=6000, and Depreciation=2000
- Before-tax cashflow based on above = -12000
- Now we take Rental Income of 25000 and deduct the above expenses, interest, and deduction amounts for the year, which gives us 2000
- Since 2000 is a positive value, we multiply this by the tax rate of 0.45, which gives us 900
- Above means that negative value 900 is the tax impact, which will be $-900
- Now we get the Before-Tax cashflow of -12000 and deduct 900 from it, which gives us $-12,900 for the after-tax cashflow - is this correct?

EXAMPLE 3
- Lets assume Rental Income=35000, Expenses (e.g. strata, water, council)=6000, Loan Repayments (inc Principal AND Interest) = 24000, Interest part of loan=12,000, and Depreciation=7000
- Before-tax cashflow based on above = 5000
- Now we take Rental Income of 35,000 and deduct the above expenses, interest, and deduction amounts for the year, which gives us 10,000
- Since 10,000 is a positive value, we multiply this by the tax rate of 0.45, which gives us 4500
- Above means that negative value 4500 is the tax impact, which will be $-4500
- Now we get the Before-Tax cashflow of 5000 and deduct 4500 from it, which gives us $500 for the after-tax cashflow - is this correct?

Thank you all in advance.

 

Yes, but you forget the medicare levy. 47% tax.

 

Thanks Terry - are my other 2 examples also correct?

 

We provide our clients with useful resources. One of them is a property investor estimation tool which assists to consider the pre-tax and post-tax cashflows as well as ownership % etc based on incomes prior to purchasing. This helps demonstrate that many properties that are an apparent -CF can become +CF or at least guide the approximate cashflow cost. I often find myself conculding with discussion with the client that their cost of maintaining ownership amounts to eg $40 a week. Its suprising how often their significant other then becomes quite relaxed about the extra debt etc Its also useful as a property comparision for the tax position of each shortlisted choice.

There are two major cashflow items many overlook
1. IO v P&I loans (P&I can have high -CF)
2. Depreciation and capital allowances (+CF)

To be honest, you cant expect Terry or anyone else to check your calculations.

 

I only read the first one.

 

Thanks, I cross-checked using your spreadsheet and my calculations are correct.