How do you build an after-tax CRE partnership model?
An after-tax CRE partnership model extends a pre-tax levered cash flow to the investor level. You track outside basis year by year, apply the passive activity loss rules to suspend losses you can't currently use, then at sale compute depreciation recapture and long-term capital gain separately. The discipline that matters is traceability: every adjustment should be visible, not buried in a nested formula.
Most acquisition models stop at pre-tax levered cash flow — the deal's cash return before any investor pays tax. The after-tax layer answers a different question: what does the limited partner actually keep? That answer runs through four dependent calculations, and each one feeds the next.
- Outside basis — the partner's tax investment in the partnership interest.
- Suspended passive losses — losses parked until there's income to absorb them.
- Depreciation recapture — the portion of gain taxed at ordinary-ish rates at sale.
- Long-term capital gain — the remainder, taxed at the LTCG rate.
Build them in that order. Skip the order and the numbers still populate — they're just wrong, quietly.
How do you model initial and annual partnership basis?
Outside basis is the partner's tax investment in the partnership interest — cash contributed plus their share of partnership debt. It moves every year: up for allocated taxable income and additional contributions, down for allocated losses, deductions (depreciation is the big one), and distributions. Basis is the gatekeeper for how much loss a partner can even use.
Set up a per-partner basis roll-forward, one row per adjustment:
- Beginning basis — prior year's ending basis (year one is contributed capital plus allocable debt).
- Plus allocated taxable income and any new contributions.
- Plus the partner's share of partnership liabilities (debt increases outside basis).
- Minus distributions.
- Minus allocated losses and depreciation deductions.
- Ending basis — carried to next year, floored at zero.
The floor at zero matters. Basis cannot go negative; excess distributions over basis become gain, and losses beyond basis are disallowed until basis is restored. Keep each line separate so you can see why basis moved — a single netted number hides the story you'll need to defend.
How do suspended and passive losses work in the model?
Rental real estate losses are generally passive under IRC §469. A passive loss can only offset passive income; the excess is suspended — carried forward until there's passive income to absorb it, or until the interest is sold in a fully taxable disposition, which frees the whole suspended balance. Your model needs a separate loss-carryforward schedule.
Two gates run in sequence each year, and order matters:
- Basis limitation (§704(d)) — a loss is only allowed up to the partner's basis. Excess is a basis-suspended loss.
- Passive activity limitation (§469) — of the basis-allowed loss, only the part offsetting passive income is usable this year. The rest becomes a passive-suspended loss.
Track a running carryforward balance for each. Release the passive suspension at full disposition. This is the section people net into one line and get wrong — keep the two suspensions distinct, and show the release event explicitly.
How do you handle depreciation recapture and capital gains at sale?
At disposition, total gain splits into two taxed pieces. Depreciation recapture — under §1250 for real property, generally the "unrecaptured §1250 gain" — is the accumulated depreciation, taxed at a maximum 25% federal rate per the IRS. The remaining gain is long-term capital gain at the LTCG rate. Compute them separately; a blended rate will misstate the after-tax proceeds.
The sale-year flow:
- Amount realized — sale price minus selling costs and debt repaid.
- Adjusted basis — original cost basis reduced by cumulative depreciation.
- Total gain — amount realized minus adjusted basis.
- Unrecaptured §1250 gain — capped at accumulated depreciation, taxed up to 25%.
- Long-term capital gain — the remainder at the LTCG rate.
- Suspended loss release — apply freed passive losses against the gain.
Layer state tax and, where relevant, the 3.8% net investment income tax on top. The output you're after is after-tax equity to each partner across the full hold — acquisition to disposition.
Should you build this in Excel or in software?
Excel is the right place to build and understand an after-tax model — you can see every dependency, and CRE underwriting fluency lives in spreadsheet formulas. The problem isn't the tool; it's what happens after the model leaves your hands: assumptions drift, tabs get copied, and a stale recapture rate rides into an investor packet unnoticed.
The Vantrow principle applies to models the way it applies to actions: propose, never commit. A system can draft the after-tax schedule, flag which cells changed since last version, and surface the basis floor breach — but a human reviews and approves before the number reaches an LP. What you want is not automation of judgment; it's an audit trail underneath it. Build in Excel, govern the handoff.
What tools model after-tax CRE partnership returns?
Options, and who each is actually for:
- A custom Excel/Sheets model — best for operators who need to see and defend every basis and recapture line. Most flexible, most error-prone without version control. This is what the original question was after.
- Institutional platforms (Argus Enterprise) — strong on lease-level cash flow and asset management; investor-level tax is typically a bolt-on, not the core.
- Syndication tools (Juniper Square, etc.) — good at investor reporting and distributions once the deal is live; less about pre-acquisition after-tax underwriting.
- A CPA-built partnership model — necessary for the actual return; slower for scenario testing during underwriting.
For most owner-operators the answer is a spreadsheet you understand cold, checked by your CPA, with a disciplined process for how the numbers move to investors.