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January 09, 2019

Cash Flow

Word of the day

Cash Flow

The spendable income from an investment after deducting from gross income all operating and fixed expenses, including principal and interest. The amount of cash derived over a certain measured period of time from operation of income-producing property after debt services and operating expenses, but before depreciation and income taxes. “Net after-tax” cash flow, or cash available for distribution, includes an allowance for income tax attributable to the income. Pre-tax cash flow is sometimes called cash throw-off. 

Cash flow is different from “net profit.” To arrive at net profit, the owner will make a deduction for depreciation but will not deduct for loan amortization. 

Two benefits of investing in improved, income-producing real property are the tax shelter provided during ownership and the anticipated appreciation in the property value that may be realized upon its sale. Thus, an investment can turn out to be profitable even if there is monthly negative cash flow. Under the 1986 Tax Reform Act, real estate tax shelters were severely limited.

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