PIA Software - TAX Credit

[Develop4Profit]

Hi,

I can't be the only one struggling to figure this out. A recent purchaser of the PIA software (which I'm very happy with, just say'in) I'm struggling to comprehend the TAX CREDIT column on the cashflows graphic.

Specifically, the tax credit tapers off over about 10yrs, which I get, tax benefits decrease over time. However around year 13, 14 the tax credit is negative and actually larger than the pre-tax cashflow... how's that?

Finally by around Year20-25 the tax credit is negative to the tune of 70% of the pre-tax cashflow - that far exceeds the tax bracket in the calculation.

Any suggestions appreciated.

 

[Paul@PFI]

Pre-tax + Credit are combined....

Pre-tax is the cashflows before tax refunds. Tax refunds taper down between 10-18 years typically. The net is the final column "after tax"...You cant look at either column in isolation.

I'm looking at one now...Pre-atx y1-Y8 are -. This means cashflow negative. Tax credits correct this making project cashflow +v. This tends to increase over time. Tax credits tend to fall over time while pre-tax will improve as net rents increasev's costs which are fairly fixed.

My issue with these projections is the interest rate one. Change rates to 7% (v's 4.85%) and see what happens !!

 

[Develop4Profit]

Tax Credits

Thanks for your Insight Paul.

What you're saying makes perfect sense and yeah a good point about interest rates, they won't stay this low forever.

In the analysis I'm running, I've got a pre-tax cashflow in yr20 of $8,633 which is ofcourse rental income - loan repayments - rental expenses. Then I have a tax credit of -$5,976 giving me an after tax cashflow of $2,657.

I would have thought your tax credits would taper to zero and then the rest would be cashflow that you'd add to your personal income and be assessed on for tax purposes (assuming you're owning as an individual).

Can you clarify that Paul? Or anyone else?

Regards,

Jason

 

[Paul@PFI]

I suspect your loan is IO. IO maintains deductions for the interest. Also 40 years capital allowance deductions means tax credits roll onwards. A loan that is P+I tends to result in $0 tax credits far quicker than a IO. But its cashflows are very negative to build equity from loan reduction. Its a interesting comparison as when you compare the equity it doesnt make much overall difference.

 

[Develop4Profit]

Thanks Paul. Loan is I/O for first 5 years and then P&I after that. Idea being that first 5 years hold while the rent should go up a little and reduce the cost after that.

Does that explain why the tax credits are negative right through to 20 years?

Regards,

Jason

 

[Develop4Profit]

Tried P&I

Hi Paul,

I tried changing it to just P&I for 30yrs. Still get massive negative tax credits towards the end that basically cancel out almost all the cashflow from the property.

Regards,

Jason

 

[Paul@PFI]

Doesnt sound right. Contact me through my website and eml me pages 1 + 4 with 20yr projection.

 

[Develop4Profit]

Thanks Paul, appreciate your help, will do.