Before-Tax Equity Reversion

Definition

Before-Tax Equity Reversion (BTER) represents the amount of funds returned to the equity investor after the sale of a property without accounting for any income taxes. Calculating the BTER can provide insight into the profitability of a real estate investment and guide decisions concerning the liquidation of properties.

Examples

Example 1:
- Property Details: A commercial property is sold for $2,000,000.
- Outstanding Mortgage: $1,200,000.
- Selling Costs: $100,000.
- Calculation:
  - Gross Resale Proceeds: $2,000,000
  - Less Outstanding Mortgage: $1,200,000
  - Less Selling Costs: $100,000
  - BTER: $700,000.
Example 2:
- Property Details: A rental property sold for $500,000.
- Outstanding Mortgage: $250,000.
- Selling Costs: $30,000.
- Calculation:
  - Gross Resale Proceeds: $500,000
  - Less Outstanding Mortgage: $250,000
  - Less Selling Costs: $30,000
  - BTER: $220,000.

Frequently Asked Questions (FAQs)

What is the purpose of calculating Before-Tax Equity Reversion?

Calculating Before-Tax Equity Reversion helps investors understand the actual amount of funds they will receive from selling a property before paying any taxes. This assists in decision-making regarding the profitability and timing of property sales.

Does BTER include the considerations of tax implications?

No, Before-Tax Equity Reversion does not include tax considerations. It solely focuses on the gross equity return before deducting any taxes.

How does BTER impact investment decisions?

By providing a clear understanding of the funds available post-sale before taxes, BTER can influence decisions related to reinvestment opportunities or liquidity needs.

Is BTER the same as Net Sales Proceeds?

While similar, BTER specifically refers to the equity available post-sale before taxes, whereas Net Sales Proceeds typically consider other factors like capital gains taxes.

How does leverage affect BTER?

The higher the leverage (i.e., the outstanding mortgage), the lower the BTER since a more significant portion of the sale proceeds will go to settling the debt.

Net Sales Proceeds (NSP): The proceeds from the sale of an asset after all costs and obligations are settled.

After-Tax Equity Reversion (ATER): The amount of funds returned to the investor after the sale of a property and after taxes have been deducted.

Gross Resale Proceeds: The total amount received from the sale of the property before any deductions.

Outstanding Mortgage: The remaining balance of the mortgage loan at the time of the property sale.

Online Resources

References

Benninga, Simon. “Financial Modeling”. ISBN: 978-0262027281.
Linneman, Peter. “Real Estate Finance and Investments: Risks and Opportunities”. ISBN: 978-0840056672.

Suggested Books for Further Studies

Geltner, David, and Norman G. Miller. Commercial Real Estate Analysis and Investments.
Brueggeman, William B., and Jeffrey D. Fisher. Real Estate Finance and Investments.

Real Estate Basics: Before-Tax Equity Reversion Fundamentals Quiz

### What is Before-Tax Equity Reversion? - [x] The funds returned to the equity investor after the sale of a property, exclusive of income taxes. - [ ] The net profit made after deducting taxes from a property sale. - [ ] The remaining mortgage balance at the time of property sale. - [ ] The gross sale amount received from selling the property. > **Explanation:** BTER is the amount of funds returned to the equity investor after the sale of a property without accounting for income taxes. ### Why is BTER important to investors? - [ ] It shows the total profit made from the investment. - [x] It helps investors understand the actual funds available from the sale before taxes. - [ ] It indicates the property's market value. - [ ] It includes tax calculations. > **Explanation:** BTER is important because it provides investors with a clear picture of the funds available from the property sale before taxes, aiding in financial planning and decision-making. ### What does BTER exclude from its calculation? - [ ] Selling costs - [ ] Outstanding mortgage balance - [ ] Gross resale proceeds - [x] Income taxes > **Explanation:** BTER calculations do not include income taxes; it focuses on the amount available to investors before considering any tax liabilities. ### Which factors are deducted from the gross resale proceeds to calculate BTER? - [x] Outstanding mortgage and selling costs - [ ] Income taxes and selling costs - [ ] Property management fees and income taxes - [ ] Both capital gains taxes and outstanding mortgage > **Explanation:** To calculate BTER, you deduct the outstanding mortgage and selling costs from the gross resale proceeds. ### What is another key term related to BTER that considers tax implications? - [ ] Gross Resale Proceeds - [x] After-Tax Equity Reversion (ATER) - [ ] Net Operating Income - [ ] Return on Investment > **Explanation:** The key term related to BTER that considers tax implications is After-Tax Equity Reversion (ATER). ### How does high leverage affect BTER? - [ ] It increases BTER by reducing debt. - [x] It decreases BTER because more sale proceeds are used to settle debt. - [ ] It has no effect on BTER. - [ ] It only affects tax calculations, not BTER. > **Explanation:** High leverage reduces BTER because a larger portion of the sale proceeds is needed to pay off the existing debt. ### What is typically not included in the calculations of BTER? - [ ] Selling costs - [x] Income tax liabilities - [ ] Outstanding loans - [ ] Resale proceeds > **Explanation:** BTER calculations do not include income tax liabilities; it focuses on the pre-tax funds returned to the equity investors. ### What ensures accuracy in the BTER calculation? - [x] Accurate records of outstanding mortgage and selling costs - [ ] Monthly mortgage statements - [ ] Estimating future property value - [ ] Real estate agent fees > **Explanation:** Accurate records of outstanding mortgage and selling costs are essential for an accurate BTER calculation. ### What impact does selling costs have on BTER? - [ ] No impact. - [x] Decreases the BTER amount. - [ ] Increases the BTER amount. - [ ] Only affects the gross proceeds. > **Explanation:** Selling costs decrease the amount of BTER by reducing the net funds available after the property sale. ### Is BTER part of the investor's return on investment? - [x] Yes, it represents a return on equity. - [ ] No, it does not represent any return. - [ ] It only reflects loan balances. - [ ] It cannot be included in ROI calculations. > **Explanation:** Yes, BTER is part of the investor’s return on investment as it represents the return on equity after the sale of the property.