After-Tax Equity Yield

• After-tax equity is generally discussed in the context of after-tax equity yield, or the total amount of money made on a real estate investment after expenses and taxes converted to a percent. This can be a relatively simple calculation if it is just a matter of calculating the sales price minus the cost and sales expenses, but can get a little more complex if the property is rented out for income for some period of time before selling.
  
  

After-Tax Equity Yield Example 1

• Let's say you bought a house for $200,000 and sold it six months later for $260,000. It cost you $20,000 in repairs and sales costs, so you made pre-tax net of $40,000. Assuming your tax rate is 25 percent, that means you will pay $10,000 in tax, and your after-tax equity will be $30,000. Converting to a percentage, you have an after-tax equity yield of 15 percent ($30,000/$200,000 = .15). In summary, you have made a 15 percent after-tax return on your investment in six months.
  
  

After-Tax Equity Yield Example 2

• Let's say you bought a house for $150,000 and sold it three years later for $200,000. You also made $12,000 a year in rent for three years for a total of $36,000, meaning you made a total of $86,000 on the transaction. It cost you $20,000 in repairs and sales expenses over the three years, so that means you made $66,000 pre-tax. Assuming a 25 percent tax rate, that means you made $49,500 in after-tax equity. Converting this to a percentage, you have an after-tax equity yield of 33 percent ($49,500/$150,000). In summary, you have made a 33 percent after-tax return on your investment, or 11 percent a year over the three-year life of the investment.
  
  

Calculating Taxes on Profits Made

• The tax rate of 25 percent in the above examples was chosen arbitrarily. In practice, each investor will be taxed on profits at a tax rate corresponding to his annual income that year, and any rent income is of course actually reported and taxed in the year it is collected. It was assumed that the tax rate worked out to an average of 25 percent in the examples for ease of calculation. Investors should substitute their own tax rates as appropriate for the years involved.