Special Asset - Rental Real Estate
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In Moneytree Plan, rental real estate are a special asset Group option. With this option you can model the value, income, expenses, and relevant sale information for the property. You can model up to 12 different rental properties.
Purchase
Enter information related to the purchase of the property in this area.
Year Purchased - Enter the year the property was purchased. You can also enter a future year to model the eventual purchase of a rental property. In that year the entered Down Payment will be reported as an expense.
Purchase Price - Enter the total value of the property when it was first purchased,
Down Payment - The down payment made when the property was first purchased.
Land Value at Purchase - Enter the value of the land when the property was first purchased. When depreciating the rental property, the cost basis will not fall below this value. The total starting cost basis for the property will be this value plus the adjusted cost basis plus any currently depreciating improvements.
Current Market Value - The current total value of the property is entered here. For future rental purchases enter the value of the property in today's dollars.
NOTE: When modeling future rental purchases only the current market value, expenses, and income are entered in today's dollars. Enter the expected future values for all other fields.
Income
Use this section to model the expected annual income from the property between rental income and other sources. Income and losses from rental properties will be treated as passive income/losses for tax purposes.
Annual Income - Enter the expected annual income between rent and other sources.
Increase Rate - Each respective income source will increase annually by the rates entered here.
Vacancy Rate - This applies to rental income only. The annual rental income will be decreased by this rate. If vacancy is already accounted for in the annual income field leave this field at 0%.
Reinvest Pre-Retirement [Aspire Only] - If the pre-retirement income from this property is being used to invest in other assets, check this box to have it automatically reinvested for Aspire projections. If the clients use this income as a standard income for living expenses the leave it unchecked. Since Prosper accounts for all incomes and expenses both before and during retirement, this option will not impact its results.
Learn more about Aspire vs. Prosper.
Cost Basis
Use these two fields to model the adjusted cost basis and years of depreciation on the property.
Adjusted Cost Basis - This is the current adjusted cost basis on the property. The total starting cost basis reported is this value plus the land value at purchase plus any currently depreciating improvements. Properties will not depreciate below the land value.
Years Remaining for Depreciation - Enter the years that the property will continue to depreciate in this field. The adjusted cost basis will decrease linearly to $0 within the entered number of years.
If the clients are not depreciating the property enter 0 for the years for depreciation.
Mortgages
You can model up to two mortgages on each rental property. To model a future mortgage enter a future date in the Date Opened field with the Original Amount equal to the Current Balance.
Even though the mortgage is opened in the future a "current" balance is still required. Moneytree Plan will know not to begin accounting for the mortgage until the year it is opened.
Sale
Use these inputs to model the basic sale information for a property. If the client does not intend to sell the property leave the Age at Sale field 0. When a property is sold any mortgages will be paid off upon sale.
Moneytree Plan will capture the taxable capital gains from the sale along with unrecaptured gains from depreciation prior to the sale.
Appreciation - This is the expected annual appreciation rate on the value of the rental property.
[Individual's] Age at Sale - Enter the age of the indicated individual when they intend to sell the property.
Sales Cost (% of Sales Price) - When the rental is sold an administrative expense for the sale will be calculated using this rate and the future value of the property.
Expenses
Use this section to model monthly and/or annual expense amounts, and the inflation rate on those expenses. The total reported expenses will be the combined monthly and annual amounts for each item.
If both monthly and annual amounts are entered for an expense amount both will be accounted for independently of each other. If expenses are higher than expected in reports, check to make sure values are not entered in both fields causing the expense to be double counted.
Improvements
In this section model any planned or past improvements on the property. If the start age is less than individual 1's age, then the improvement will be considered a past improvement. Moneytree Plan will retroactively adjust the starting cost basis based on the amount, years since the improvement occurred, and the years for depreciation.
Amount - Enter the expected or original cost of the improvement in today's dollars. For planned improvements an expense will appear the year of the improvement.
Increase Rate - The amount for planned improvements will be increased by this rate for the years leading up to the improvement. This will have no impact on past improvements.
Start Age - Enter individual 1's age when the improvement occurred or is planned to occur.
Years for Depreciation - Use this field to determine how long the improvement will be depreciated for. The adjusted cost basis will decrease linearly based on the amount and this value. The first and last years of depreciation will be half of all other years.
For future improvements:
Depreciation = [Amount * (1 + Increase Rate) ^ (Start Age - Current Age)] / Years for Depreciation
First & Last Year = Above Value / 2
For past improvements:
Depreciation = Amount / Years for Depreciation
Last Year = Above Value / 2
NOTE: Since the first and last years are half of others, the depreciation will be reported for one year longer than the entered years for depreciation.
Taxation
There are several factors to consider when determining taxation on rental properties, both before and during sale. In order to ensure the most accurate tax calculations it is recommended to enter as much information related to the property as possible.
Prior to Sale
While the rental is generating income (or losses) before being sold the taxation is reported as schedule passive income/losses.
Taxable income = Income Sources - Expenses - Improvements - Mortgage Interest
If the above calculation results in a loss, up to $25,000 can be deducted in that tax year. Any non-qualifying losses are carried forward for future years. The allowable deduction begins to phaseout are certain levels of modified adjusted gross income, or MAGI (AGI + tax free interest). The phaseout begins with MAGI of $100,000 and is completely phased out for MAGI of $150,000 or more.
In Prosper reports the total income or allowable loss are added together with other sources as part of the overall ordinary income tax calculations. In Aspire incomes are taxed at the effective ordinary income tax rate, whether calculated by Moneytree Plan or designated in Taxes > File Status / Options > Tax Rate Overrides. Allowable losses are reduced by that same rate.
At Sale
At the time of sale taxation will be split between capital gains and appreciation. Moneytree Plan assumes sales at the end of the year and gains will be reported for long term capital gains. Sales are assumed to occur at the end of year, so you will still see income, expenses, and depreciation at the year of the sale.
Proceeds from Sale = Future Value of the Property - Sales Costs
[Though not technically a tax, this is included here since the sales costs reduce the value from the sale by some rate]
Capital Gains = Future Value of the Property - Cost Basis at Sale - Unrecaptured Gains
The capital gains from the sale will be taxed at long-term capital gains rates. In Prosper reports these gains will be added to other sources of capital gains to calculate the overall capital gains taxes. In Aspire reports the gains will be taxed at the effective capital gains rate, whether calculated by Moneytree Plan or designated in the Taxes > File Status / Options > Tax Rate Overrides.
Unrecaptured Gains = Cumulative depreciation prior to sale
Unrecaptured gains are taxed at a 25% tax rate. In Moneytree Plan, this is the calculation unrecaptured gains:
Depreciated Value Prior to Report = Purchase Price - Land Value at Purchase - Adjusted Cost Basis
[For already existing rentals only]Cumulative Depreciation = Sum of Values from Column 1 on Income & Tax Analysis report (G1b, G2b, G2b, etc.)
Unrecaptured Gains = Depreciated Value Prior to Report + Cumulative Depreciation
Summary of factors to consider when determining depreciation and cost basis:
Purchase Price - For past purchases, this is used to account for any current depreciation prior to the report.
Land Value at Purchase - Determines minimum cost basis, and current depreciated values for past purchases.
Adjusted Cost Basis - Determines the starting cost basis.
Years for Depreciation - Sets how long the adjusted cost basis will decrease linearly to $0.
Improvements:
Amount - Gets added to the cost basis at the year of the improvement (the value added to the cost basis will be lowered for past improvements).
Increase Rate - Increases the amount to a future value for future improvements.
Start Age - Determines when the improvement will be reported.
Years for Depreciation - Used to determine the annual depreciation, with the first and last years being half of the others. The amount will depreciate linearly to $0.