Ask the Expert: The Exit Math Your Pro Forma Leaves Out

By Steve Waller · October 21, 2026

Ask the Expert: a guest post from Kasing Ng, CPA, a former Big 4 fund auditor who does the after-tax read on real estate deals.

Quick answer: The flip-versus-rent comparison on a pro forma is a pre-tax number. A flip is taxed as ordinary income plus self-employment tax, with no 1031. A rental gets depreciation along the way, then pays some of it back at sale at up to 25 percent. The after-tax answer can change which exit actually wins.

Most deal analysis stops at the same place: run the flip exit, run the rental hold, compare the two. That's the right move. The catch is that both of those numbers are pre-tax, and the after-tax answer can quietly flip which exit actually wins.

Here's the part that catches people after it's too late.

If you flip it

The IRS doesn't see an investment, it sees inventory, the same shelf as the shoes in a shoe store. That makes you a "dealer," and it changes three things. Your profit is ordinary income at your regular rate, even if you held it over a year. You owe self-employment tax on top, around 15 percent, since flipping is a business. And you can't 1031 into the next deal, because dealer property is shut out.

So clear $100,000, pencil in the 15 percent capital gains hit everyone assumes, about $15,000, and the real number can pass $35,000. A flip never gets depreciated, so there's no recapture to chase. It's ordinary from the first dollar.

If you hold it and rent

Depreciation changes the math at the back end. Every year you write the building down, your tax basis drops with it, so your gain at sale isn't "sale price minus what I paid." It's sale price minus a basis that's been ground down, which means the depreciation that saved you taxes all along comes right back into the gain when you sell.

People call it recapture, and it doesn't get the lower capital gains rate. The straight-line piece on the building returns as "unrecaptured Section 1250 gain," taxed at up to 25 percent, not the 15 or 20 percent a long-term gain would get. Ran a cost-segregation study? Those faster pieces are the true recapture, and they come back as ordinary income at your full rate. Then the 3.8 percent net investment income tax and your state stack on top.

Put real numbers on it

Buy at $1,000,000, hold five years, write off about $145,000 on the building, sell for $1,300,000. The property gained $300,000, but your taxable gain is about $445,000, because that depreciation came off your basis. The $145,000 gets hit at 25 percent, the $300,000 at capital gains rates, and NIIT and state land on top of both. Your pro forma showed a clean net check and not a dollar of it.

So which exit wins?

The flip hands you cash now, but it's all taxed at once, ordinary plus SE, with nothing you can defer. The hold is the opposite. You can push the tax down the road, and if you trade one rental for another, a 1031 rolls the whole gain forward, the 25 percent layer included, instead of paying any of it today. A flip can't touch a 1031. The pre-tax spread won't tell you which path keeps more. The after-tax number will.

It's the same discipline you already use on the financing side. Know it before you're under contract, not after. Run the after-tax exit on both paths while you still have the choice.

ACP's Deal Estimator runs the flip exit against the rental hold before tax. Kasing's numbers are the layer to put on top of it before you sign.

About the Author

Kasing Ng, CPA

Kasing Ng, CPA, is a former Big 4 fund auditor who does the after-tax read on real estate deals, the recapture and exit math pro formas leave out. credevsim.com

This post is general information, not tax advice for your situation. Talk to your own CPA before you act on it.

The full report is available at ACP's website, acp-lending.com. Investors can sign up to receive new reports by email at acp-lending.com/investor-brief.

Sources

• Kasing Ng, CPA

Market data is from public sources and is provided for information only. Nothing here is an offer of credit, a rate quote, or investment advice. Financing is subject to underwriting, lender approval, appraisal or valuation, title, insurance, property eligibility and program availability.

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