Real Estate Modeling 101: What’s not in the Proforma?
What’s NOT Included in the Real Estate Pro-Forma: Taxes and Depreciation
Two questions about real estate pro-formas that get asked all the time are:
“Why doesn’t the pro-forma include income taxes?”
“What about depreciation? Isn’t it a major expense in real estate?”
Why Income Taxes Are Excluded
Income taxes are typically omitted from real estate pro-formas because most properties are owned by pass-through entities (like partnerships or LLCs).
In these structures, the entity itself doesn’t pay corporate-level taxes. Instead, each partner or investor reports their share of income and pays taxes individually based on their personal tax situation. Since tax rates and liabilities vary widely among investors, including taxes in the pro-forma wouldn’t provide meaningful insight.
If we were modeling a taxable entity, such as a C corporation that owns real estate, income taxes would be relevant and included.
Why Depreciation Is Excluded
Depreciation is also left off the pro-forma because it is a non-cash expense. Its primary purpose is to allocate the cost of long-term assets (e.g., buildings) over time and provide tax benefits.
However, since the pro-forma focuses on cash flow and excludes income taxes, depreciation serves little purpose in this context. In effect, capital expenditures (CapEx) already reflect the real, ongoing costs of maintaining the property, so depreciation isn’t necessary here.
If we were working with a taxable entity, depreciation might appear on the pro-forma to account for tax-related impacts—but only in cases where taxes play a role in the financial model.
In summary, income taxes and depreciation are excluded from standard real estate pro-formas because the focus is on cash flow rather than accounting or tax considerations.