How are depreciation lessening taxes factored into a Real Estate deal when its not on the income statement...

RE income

Depreciation is obviously a big deal in any business, esp. real estate, and on real estate income statements I don't see depreciation, so where is it accounted for and how does it flow through to the equity?

I.e. how to calculate the true yearly cash flow of a property after factoring in depreciation?

Comments (5)

Sep 2, 2018

I'm not in real estate but it would be included in the operating expenses in your example income statement.

Sep 2, 2018

On a property-level proforma, depreciation is not accounted for at all. I know that this is quite surprising, however it is the industry standard. Neither NOI nor PLCF are an exact proxy for the standard net income line item in a 10-k.

It is not as common, but some funds include a depreciation recapture line item after the PLCF.

Sep 2, 2018

Ok so how do I actually adjust something like that to include depreciation and post-tax cash flow. I don't really give a crap about anything except what the equity distributable to investors is, right?

So let's say we get an LP llc with 5 guys putting money in, and a GP managing the 5 residential short-term rental properties. How are those generally going to be taxed? Standard corporate rate, or some type of pass through to the individuals?

Why would depreciation not be factored into a property income statement like a normal company 10-k?

Ultimately I'm just trying to figure out what the real cash flows are at the end of the day.

THanks for the help

Sep 2, 2018

Because depreciation only affects the after tax cash flow, and your picture seems to be before tax cash flow.
Your property level cash flow should include a line item below it, subtracting the tax liability (or adding tax savings), then you achieve your after tax cash flow. A lot of different shops will do it differently, this is just the way I was taught.
That line about your tax will include depreciation to lessen your tax burden.

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Sep 2, 2018
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