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The income statement summarizes future projections for rental
income, other income, operating expenses, mortgage interest,
depreciation, taxable income, etc., associated with an income
property. The gross rents possible and other income are
projected forward at the income growth rates entered by the
investor. Operating expenses are projected forward at the
expense growth rates entered. If a vacancy factor is entered,
it is applied to the gross income from the property to determine the
property's effective gross income. In
the income statement
below,
operating expenses are subtracted from the effective
gross income to arrive at the net operating income or NOI for the property. Loan
interest, depreciation, unamortized points, etc. are subtracted
from the net operating income to calculate the taxable income.
The most important line item on the income statement is taxable
income. The taxable income from the income statement is multiplied
times the investor's state and federal tax rates on the Cash flow
statement to determine the investor's tax liability. The state and
federal tax liability is then subtracted from before-tax cash flows
to determine the investor's after tax cash flow. If you would
like to learn more about investor tax rates, click on Federal
Marginal Tax Rate
The operating expense ratio and the net income ratio at the
bottom of the income statement can be helpful in identifying
potential operational problems. To learn more about the
operating expense ratio and how to identify problems via expense
item ratios, click on
Operating
Expense Ratio
If you are
unfamiliar with operating expenses and would like to learn more, click on
Operating
Expenses
Commercial income properties are depreciated over 39 years and
residential income properties are depreciated over 27 1/2 years.
The On Target software calculates 11 1/2 months of depreciation for
the building in the first year and a full year of depreciation for
each successive year. To learn more about depreciation, click
on
Depreciation
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