There are two major cash flows derived from a real estate investment. Cash flows received during the holding period from the renting of space, and the cash inflow from termination of the investment property at the end of the holding period (reversion).

Let’s consider reversion, the second major cash flow. Reversion is the cash resulting from the sale of the property minus the expenses of selling, the remaining amortization of original qualified financing costs, payoff of the remaining mortgage balance, and the balance reduced by taxes owed on the sale.

Okay, now let’s consider each of these components:

1. Selling Price - At the end of the holding period a sale of the asset typically occurs. In this case, from the sale price must be deducted the expense of selling to include any remaining unamortized costs of financing incurred during the original purchase.
2. Cash Flow Before Tax at Sale (CFBT or Before Tax Equity Reversion BTER) - This is calculated by subtracting the remaining mortgage balance from the net sale price (above).
3. Cash Flow After Tax at Sale (CFAT or After Tax Equity Reversion ATER) - This is calculated by subtracting the amount of tax liability incurred on the sale from the CFBT. If an investment has sufficient tax shelter this calculation may result in a tax saving. The total gain on the sale is calculated by subtracting the investment property’s adjusted basis from the net sale price.

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