Glossary & methodology

The discount rate that makes the present value of an investment's cash flows equal zero. In plain English: the annualized return you're actually earning, accounting for the time value of money.

0 = NPV = Σ Cₜ / (1 + IRR)ᵗ − C₀
        t=1 → T

Where C₀ = initial equity (down payment + closing costs + repairs + inspection + furniture), Cₜ = net cash flow in year t (rent − operating expenses − P+I + tax effects), and the final period also includes net exit proceeds.

The app solves this equation with Newton's method using 6 starting seeds for robustness. Reported as either after-tax IRR (Individual mode, includes §1245/§1250/LTCG/NIIT recapture at exit) or pre-tax IRR (Company mode, no individual-tax overlay).

Cap rate = NOI ÷ purchase price.A property- level yield metric — how much income the property throws off as a percentage of its price, ignoring how it's financed. Useful for comparing properties, less useful for measuring your personal return (because financing changes the picture).

Annual rental income minus all operating expenses — property taxes, insurance, HOA, utilities, property management, marketing, and maintenance. Excludes mortgage P+I because NOI is the income the property generates regardless of financing. Feeds into cap rate and is the conventional appraisal-input metric.

Annual cash flow (after mortgage payment) divided by total cash invested at t=0. Cash invested includes down payment + closing costs + repairs + inspections + furniture. A simple year-1-economics measure that ignores appreciation, principal paydown, and tax effects — useful as a quick filter, but IRR is the better deal-making metric.

Pre-tax cash flow: rent − all operating expenses − full mortgage payment (P+I). After-tax cash flow:pre-tax cash flow plus the cash effect of the rental on your tax bill (negative paper losses generate tax savings against W-2; positive Schedule E income owes tax). The sidebar's “Net” figure is pre-tax; the “After-tax monthly” row is the same figure with tax effects layered on.

Total capital deployed at acquisition: down payment + closing costs + repair/rehab + inspection + furniture & appliances. The t=0 outflow in the IRR calculation. Cash-on-cash uses the same denominator.

For short-term rentals, the equivalent monthly rent at full occupancy: nightly rate × occupancy% × 365 ÷ 12. Lets STR cash flow be modeled in the same monthly framework as LTR.

A rental with multi-month leases (typically 12-month). Default tax treatment is passive activityunder §469 — losses can't directly offset W-2 wages unless the user qualifies for the §469(i) allowance or REPS.

A rental where the average customer stay is short (vacation rental, Airbnb-style). Tax treatment depends on average stay length. If average stay ≤ 7 days AND the owner materially participates, losses are non-passiveper Reg 1.469-1T(e)(3) — the “STR loophole.”

The amount borrowed: total price − down payment. Drives the monthly P+I and the remaining-balance lookup at sale (used for the mortgage-payoff line at exit).

The monthly mortgage payment, computed via the standard amortizing loan formula (PV-of-annuity inverse). Constant for a fixed-rate loan, but the split between principal and interest changes — early years are interest-heavy, later years are principal-heavy. Only the interest portion is deductible on Schedule E.

One-time costs at acquisition: loan origination fees, title insurance, transfer taxes, recording fees, escrow setup, attorney fees. Typically 2–5% of purchase price. Added to initial equity for IRR purposes; some are basis additions, some are amortizable, but the app simplifies them as immediate cash outflow at t=0.

For a property where the owner occupies part of it (e.g., duplex with one unit lived in), only the rented fraction of shared expenses (mortgage interest, taxes, insurance, HOA) and depreciable basis goes on Schedule E. The form's slider sets this fraction; defaults to 100% (fully rented).

A non-cash deduction that recovers the cost of the building over its useful life. Real estate is depreciated under MACRS (Modified Accelerated Cost Recovery System). The deduction reduces taxable rental income each year, often producing a paper loss even when cash flow is positive. Land is not depreciable — only the building and its components.

The depreciable cost basis of the structure: purchase price minus land value. Default land allocation in the app is 25% of purchase price (a common heuristic; actual property tax assessor records or appraisals can refine this).

Residential rental property uses 27.5-year straight-line depreciation. STR property where the average customer stay is ≤ 30 days qualifies as transient lodging under IRC §168(e)(2)(A)(ii) and uses 39-year depreciation (longer life = smaller annual deduction). The app picks the schedule based on rental type and average stay.

An engineering study that reclassifies portions of building basis from 27.5/39-year property into shorter recovery periods — 5-year (carpet, appliances), 7-year (furniture, fixtures), 15-year (land improvements). Typical studies reclassify 20–35% of basis. The reclassified short-life portion is also eligible for bonus depreciation, which can produce massive year-1 deductions. Studies cost ~$5–15K (engineering report).

A first-year accelerator that lets you deduct a percentage of qualifying short-life property in year 1 instead of spreading it over the recovery period. Combined with cost segregation, this is the source of large year-1 paper losses.

Tax legislation signed July 2025 that made 100% bonus depreciation permanentfor qualifying property both acquired AND placed in service after January 19, 2025. Pre-1/20/2025 acquisitions remain on the pre-OBBBA 40% bonus rate. The app's “Acquired before Jan 20, 2025” checkbox handles the cliff.

Many states “decouple” from federal bonus depreciation — they require you to add back the bonus amount when computing state taxable income. CA, NY, NJ, PA, MD, DC, AR, NC, MN, OH, MS, WI all decouple to varying degrees. The app shows a red-bordered note in the cost-seg panel when your state decouples and recomputes state savings accordingly.

Original cost basis minus cumulative depreciation taken. Used at sale to compute realized gain (sale price − adjusted basis). Heavy depreciation (cost seg + bonus) reduces basis quickly, which means more gain at sale — and the recapture rules at exit reclaim a lot of that.

Rental real estate is automatically a passive activity under §469, regardless of how much you participate. Passive losses can only offset passive income — they can't offset W-2 wages. Excess losses are suspended and carried forward.

A carve-out from the passive-loss rule: up to $25,000 of rental losses can offset W-2 income if you actively participate. The allowance phases out between $100,000 and $150,000 MAGI (50¢ phase-out per $1 over $100K). MFS gets half the allowance, and only if the spouses lived apart all year (§469(i)(5)).

A higher bar than active participation. The two prongs the app models: (a)(1) more than 500 hours in the activity for the year, OR (a)(3) ≥ 100 hours AND not less than any other individual's hours. Material participation is the gateway to non-passive treatment via STR loophole or REPS.

If a rental's average customer stay is ≤ 7 days AND the owner materially participates, the activity is treated as non-passive. Losses can fully offset W-2 wages — without needing to qualify as a real estate professional. The app checks both prongs and reports eligibility.

A taxpayer who (1) spends > 750 hours in real estate trades or businesses, (2) more than 50% of personal services in real estate, and (3) materially participates in their rentals can treat rental losses as non-passive. Common for one-W-2-spouse households where the other spouse can hit the hours threshold. The app supports per-spouse REPS qualification.

The app determines loss treatment in order: (1) §280A vacation home triggered → suspended; (2) STR loophole eligible → non-passive; (3) REPS eligible → non-passive; (4) §469(i) passive allowance available → partial deduction up to the cap; (5) otherwise → suspended (carried forward).

If you use the rental personally for more than the GREATER of 14 days OR 10% of fair rental days, §280A caps deductions at gross rental income — no loss can flow to W-2 regardless of STR/LTR or REPS. The form's “personal use days” input drives this check.

When you sell a passive activity in a fully taxable disposition, all suspended losses from that activity are released and treated as non-passive — they become ordinary deductions, offsetting other income (typically W-2). The app tracks the suspended-loss pool across the projection years and applies the release at sale.

A 20% deduction on qualified business income, including rental real estate that meets the Rev. Proc. 2019-38 safe harbor (250+ hours of rental services per year, separate books, and contemporaneous logs). The app applies this when material participation hours ≥ 250 and Schedule E is positive.

A 3.8% surtax on net investment income for high earners (MAGI > $200K single/HoH, $250K MFJ, $125K MFS). Applies to positive Schedule E from passive rentals; non-passive rental income (STR loophole / REPS) is generally exempt from NIIT but capital gains at exit are NIIT-subject regardless.

Sale price − selling costs − adjusted basis. The taxable gain from selling the property. Heavy depreciation increases this because it reduces basis dollar-for-dollar. The app then breaks the gain into components taxed at different rates.

Depreciation taken on cost-segregated short-life property and bonus-depreciated property is recaptured as ordinary income at sale (your marginal rate, not LTCG). This is the painful side of cost seg — the year-1 tax savings come back as ordinary income at exit, often at a higher rate than capital gains. Capped at the lesser of accumulated short-life dep or realized gain.

Depreciation taken on the building (27.5/39-year SL portion) is taxed at a maximum 25%rate at sale per IRC §1(h)(1)(E). Not strictly “recapture” in the §1250 sense (SL depreciation creates no ordinary recapture under §1250) — the 25% cap is its own special rate within the LTCG framework.

Gain on assets held more than 1 year, taxed at 0%/15%/20% depending on filing status and taxable income. After §1245 and §1250 portions are carved out, the remaining gain (the appreciation portion) qualifies for LTCG rates. The app uses the 2025 brackets per Rev. Proc. 2024-40.

At sale, the realized gain stacks: §1245 recapture first (ordinary), then unrecaptured §1250 (max 25%), then remaining LTCG. State tax applies to the full gain (most states tax CG as ordinary; the app uses the top marginal state rate as a conservative approximation). NIIT applies to net gain after §469(g) release.

Defers all recapture and capital-gains tax by rolling proceeds into a replacement investment property within 180 days (45-day identification, qualified intermediary, real property only post-TCJA). The exchanged property inherits the original's adjusted basis, so the deferred gain resurfaces if the chain ever breaks.

Modeled in the Exit planning section (toggle to “§1031 exchange”): zeros out federal exit tax, displays the deferred gain rolled into replacement basis. Suspended passive losses (§469(g)(1)) do not release on a §1031 — they carry forward attached to the replacement property, so this scenario forfeits the suspended-loss release a sale would have produced. Boot (cash kicked back to the seller) is not modeled — the app assumes a clean exchange.

When a property owner dies, the heirs receive the property at its fair market value at death — basis steps up, eliminating all built-in gain (LTCG, unrecaptured §1250, §1245). This is why “buy, borrow, die” is the canonical tax-strategy endgame for real estate.

Modeled in the Exit planning section (toggle to “Hold to inheritance”): zeros out exit tax and reports the full pre-tax sale proceeds as the after-tax exit. Suspended passive losses are deductible only to the extent they exceed the step-up (§469(g)(2)) — for a depreciated rental the step-up almost always exceeds the suspended pool, so the app treats them as forfeited. Estate tax not modeled (federal exemption $13.99M / $27.98M MFJ in 2025).

Optional override for the MAGI used in the exit-tax calc only — lets the user model selling in a low-income year (sabbatical, retirement, between jobs). Lowering MAGI can drop the federal LTCG rate from 20%→15%→0% (per Rev. Proc. 2024-40 brackets) and put the seller below the §1411 NIIT threshold ($250K MFJ / $200K single), eliminating the 3.8% surtax on the gain. In-year projection cash flows still use the rolling MAGI from the tax profile — only the exit calculation reads the override.

For most filers, AGI plus a few add-backs (foreign earned income exclusion, etc.). Used as the threshold for §469(i) passive-allowance phase-out, NIIT applicability, and LTCG bracket placement. The app approximates MAGI as W-2 + other income.

Single, MFJ (Married Filing Jointly), MFS (Married Filing Separately), or HoH (Head of Household). Drives federal bracket placement, LTCG breakpoints, NIIT thresholds, and the §469(i) allowance treatment.

MFS filers get a passive-loss allowance of $0 unless they lived apart from their spouse for the entire taxable year, in which case they get $12,500 (half the standard $25K). Common trap — the app's profile page has a “Lived apart all year” checkbox to enable the allowance.

The IRS form where rental income and expenses are reported. Each property gets its own column. The app's build-up table mirrors the Schedule E layout: gross rent − operating expenses − mortgage interest − depreciation = Schedule E income/loss for the year.

The app shows a pure stock-market alternative: invest the same initial equity at t=0 in a buy-and-hold S&P 500 index fund, hold to year N, sell. Default 10% nominal annual return (S&P 500 long-run historical, 1928–2024, dividends reinvested); editable per-analysis. After-tax variant subtracts LTCG + state ordinary rate + NIIT (when applicable) on the gain.

Both sides of the comparison report net gain/loss = end-of-hold cash − initial equity. Subtracting the equity that was put in at t=0 isolates the actual gain (or loss) on the investment, so the two sides are comparable apples-to-apples.

Individual mode (after-tax):rental end-of-hold cash is cumulative after-tax cash flow plus after-tax exit proceeds (sale price − selling costs − mortgage payoff − exit tax). The S&P side is the after-tax sale value of the index fund position (LTCG + state ordinary + NIIT on the gain).

Company / entity mode (pre-tax):entity tax is not modeled, so both sides are reported pre-tax for symmetry. Rental end-of-hold cash is cumulative pre-tax cash flow plus pre-tax sale proceeds; the S&P side is the gross terminal fund value with no cap-gains overlay.

When Investor Type is set to “Company / entity” with treatment “Pre-tax only,” the app skips the personal-tax overlay entirely and reports IRR on pre-tax cash flows. Personal-tax constructs (§469 passive losses, STR loophole, REPS, NIIT, QBI) don't apply to entity-held property the same way — the entity's preparer handles those at the corp / pass-through return level. Use this when the entity is a partnership, S-Corp, or multi-member LLC and you want the “before personal tax” figure. For modeling your personal K-1 share, switch to Individual mode and set the Ownership % field — the app will scale rent, expenses, depreciation, equity, and exit proceeds to your share while running the full personal-tax overlay at your MAGI.

Pass-through entities (multi-member LLC, partnership, S-Corp) don't pay federal income tax themselves; net income / loss flows to the owners pro-rata via K-1, and each owner reports their share on Schedule E of their personal return. The §469 passive cascade, NIIT, LTCG bracket, REPS / STR eligibility all apply at the owner's level using their MAGI.

Modeled in the app as Individual mode + Ownership %: enter the entity's full numbers (purchase price, down payment, rent, etc.) and set Ownership % to your share. The projection scales rent, expenses, depreciation, mortgage, initial equity, and exit proceeds linearly. Default 100 = solo owner, no scaling.

Simplifications:assumes 100% distribution of cash each year (partners typically distribute fully so they can fund their personal tax bill on K-1 income — this side-steps the “phantom income” problem where positive K-1 income is taxed even when no cash was distributed); ignores §704(b) special allocations (treats ownership as proportional pro-rata); ignores outside basis tracking and §465 at-risk limits (passive losses are deducted even if they technically exceed basis); ignores §752 debt allocation (treats debt as proportional to ownership). Real estate rental income generally isn't subject to self-employment tax per §1402(a)(1); the app skips SE-tax modeling.

When “Entity tax treatment” is set to C-Corporation, the app applies entity-level tax at the corp level: 21% federal(TCJA, IRC §11) plus state corp tax (lookup table for major states; falls back to individual top marginal rate elsewhere). Cap gains on the sale are taxed at the same 21% — C-corps don't get the preferential LTCG rate that individuals get.

NOL carryforwardis tracked across years per TCJA: indefinite life, capped at 80% of any future year's taxable income. NOLs from C-corp losses can also offset gain at exit (subject to the same 80% cap).

State minimums for major states (CA $800, DE $300, MA $456, NJ $500) are applied as a floor when the computed state tax otherwise comes in lower. TX is a margin tax (0.75% × revenue), not an income tax.

C-Corp distributions to shareholders are qualified dividendstaxed at the shareholder's LTCG rate (0%, 15%, or 20% based on MAGI). State piece treats dividends as ordinary income; NIIT (3.8%) applies if MAGI exceeds the §1411 threshold. This is the second leg of C-corp double taxation: the corp pays 21% on income, then the owner pays LTCG + state + NIIT on the distributed portion.

The app surfaces an annual distribution rate (% of after-corp-tax income distributed). 0% retains everything in the corp (deferred dividend tax until exit); 100% distributes everything each year. At exit, after-corp-tax sale proceeds are assumed to be a final liquidating distribution taxed as a qualified dividend (simplification — selling stock at the owner level would be capital gain on stock, which gives similar numbers at LTCG rates).

Recurring annual cost of running the entity: tax-return preparation ($800–3K/yr for a 1065 / 1120 / 1120-S), registered agent ($100–300/yr), state annual reports and franchise filings, bookkeeping. Stored monthly in the form; always deductible at the entity level (regardless of pre-tax vs C-corp treatment); flows into operating expenses on the projection. Typical blended figure: $50–250/mo for a single-property entity.