ProAPOD has updated Basic 6.0 and CFA 7.0 real estate investment software in response to a suggestion made by a new user recently about the “Cost of Acquisition” portion of the Loan Information Form (”LoanInfo” form). Seemingly there was some confusion on her part about how to complete it, so I modified it.

The Current Versions

ProAPOD designed it’s real estate software to include a computation for cost of sale so it can accurately calculate a key rate of return formula. Moreover, it allows you the option of selecting whether you want ProAPOD to compute it as a percent of sale price, or as a dollar amount. In the percent of sale price price field you’re given a drop-down menu and can select any percentage from 0.05 to 2.00%; in the dollar amount you need only to specify an amount. Should both entries be made inadvertantly, you get an alert message telling you that you can’t do that, the dollar amount you entered is deleted, and you’re asked to try again.

The Updated Versions

1. The percent of sale price drop-down menu now includes the option to select a blank amount.
2. When the alert message appears, it will delete both, the percent of sale price and dollar amount fields.
3. Some labels on the form have been rewritten to include slightly more detailed instructions.

You can retrieve this free update from your Customer Solutions Homepage.

The successful real estate investor never regards a real estate investment like an immediate member of the family. Real estate is not purchased, held, or sold on emotion; it’s not love that compels, it’s all about a return on investment. So the prudent real estate investor will always consider several basic returns to determine the potential benefits of purchasing, holding on to, or selling an income property investment. And being able to understand these investment decision basics, where they come form, and how to calculate them is at the root of real estate investment success.

We will discuss all these basic returns in this multi-part series, beginning with cash flow (sometimes called the “bottom line”). By this, referring to before-tax cash flow, not the amount of cash flow that’s left over after you pay your income taxes on the property’s earnings (or the after-tax cash flow sometimes labeled “net spendable cash”).

1. Cash flow. How much money comes in from rents and other income, and how much money goes out for operating expenses and debt service (loan payment) determines what a property’s cash flow is. Simply put, cash in minus cash out equals cash flow. When more cash comes in than goes out, the result is “positive cash flow” you can pocket. On the other hand, when you have to spend more than you take in, the result is “negative cash flow” that requires you to dig into your pocket and feed the property. The goal, of course, especially for the small investor without deep pockets, is to be sure the property always produces enough cash to pay the bills. So run the numbers.

When looking at a property to purchase, for example, one popular method is an annual property operating data (APOD). It will create a virtual “snapshot” of the property’s income and expenses for the first twelve month period, and when realistic income, expense, and loan data is feed in, the APOD will provide you with the bottom line (whether positive or negative). It’s only one part of a good rental property analysis, but it does offer a quick and easy way for you to at least project and judge whether you might want to pursue a purchase or not with less chance you might get unpleasantly surprised later.

A sample annual property operating data (APOD) is available if you would like to preview one. We’ll continue this series next time. Stay tuned.

If you’re a real estate investor, and you’re planning to sell an income property owned for more than one year, you’re probably aware you will pay a capital gains tax. What you might not be aware of is the depreciation recapture tax you will also pay, and may be in for an unpleasant disappointment.

This was suggested to me recently by an real estate investor who never saw the recapture tax coming. Only to discover it later when his federal tax obligation computed higher than he originally anticipated, and the proceeds he expected to receive computed lower. This is not a good thing. So it seems appropriate to mention it as a bit of income property advice to the new realestate investor.

Depreciation recapture tax occurs when depreciable real estate is sold after one year of ownership. Property sold one year or less is classified as a short-term gain and gets taxed as ordinary income; so it’s irrelevant. Capital gains and the recapture tax only apply to a property held for more than one year.

In real life, here’s how it works. When you sell an income property and have a recognized gain, the feds want to tax you for the capital gain, plus they want to tax you for the accumulated depreciation you’ve taken during the years you owned the property. Because the current capital gains tax rate is 15% and the recapture tax rate is 25%, you wind up paying more tax (thus, get to keep less) at the sale of your property than you would have by having to pay just the capital gains tax alone.

For example, if you realize a gain of $300,000 of which $100,000 is attributable to depreciation, your taxes might compute this way:

1. Your accumulated depreciation of $100,000 gets taxed at 25%. Hence, you owe $25,000 recapture tax.
2. The $200,000 remainder (300,000 - 100,000 = 200,000) gets taxed at 15% (the current capital gains tax rate). Hence, you owe $30,000 capital gains tax.
3. Your tax obligation for real estate capital gains totals: 25,000 plus 30,000. Hence, you owe $55,000.

Now suppose you had no knowledge of depreciation recapture tax. You would probably assume when you sell that your full gain will be taxed as capital gains. In your mind, the full $300,000 gain gets taxed at 15%, and thereby conclude that you owe the IRS $45,000. Imagine the shock when you learn that you owe $55,000; a whopping $10,000 more tax than expected; hence, $10,000 less proceeds than expected (say goodbye to the wide-screen television).

The bottom line? Real estate investing requires sound real estate investment tax strategies. So you should always consult a tax specialist before you sell rental income property, and maybe think about investing in a good real estate investment software program. It might keep you from getting blindsided at tax time, and likewise prevent unrealistic expectations that result in an unpleasant disappointment later.