Phantom Cash Flow
This is an interesting term, have you heard it before? Phantom Cash Flow is something you might overhear a sophisticated investor using. Phantom Cash Flow is basically referring to income or cash flow your making, but you won’t actually see the cash itself, because it is kind of Phantomish. Let me explain using real estate as a teaching example.
If you own a piece of real estate as an investment, that real estate is like a mini-business, it has income and expenses. And at the end of the year you have to file a profit/loss also called a ( P & L) at the end of the year. You got to file taxes.
One of the great tax deductions that real estate offers is called Depreciation. Depreciation allows you to write off a percentage of the value of your building each year over a certain amount of time. Basically if you own a building Depreciation is a nice write-off that you can declare as an expense and reduce your net taxable income for a long time. See the government made this tax rule that if you own a building, they recognize that your building is sorta falling apart over time and is depreciating in some what, so they let you incur this as an expense that you can write off, which will reduce your net taxable income. If you reduce your net taxable income, you of course pay less in taxes.
Let us say that an apartment building you own brought in $200,000 in revenue this year. And that your building depreciated about $20,000. So now on your taxes you can put an extra $20,000 of depreciation on your apartment expenses. This is basically an expense that you can write off. So what happens is your net taxable income was originally $200,000 is now $180,000 because you just wrote off $20,000 worth of depreciation expense. See the deductions again; lower your net taxable income. This in return will make you pay less tax at the end of the year.
See, this is an example of Phantom Cash Flow. You were able to decrease your net taxable income by $20,000 by using depreciation as an expense. This reduce in net taxable income means you essentially make more money at the end of the year because your paying less in taxes. So this is extra money in your pocket that you are going to receive, more as a savings because you are paying less int axes. But it is still money extra your earnings/saving, this is why its called Phantom Cash Flow.
If we can reduce you from paying $50,000 in taxes to only having to pay $30,000 in taxes. You basically just gained an extra $20,000 in cash flow because that was extra money you saved! You kept an additional $20,000 in wealth, but you diddn’t really get the cold hard cash to say, but it is extra income because you just saved a bunch of money on taxes. Money you earned but your not really seeing. This is why it is called Phantom Cash Flow. Cash Flow that is being earned, but you don’t see it, thats why it’s sorta Phantomish as I like to say.
Now you know what Phantom Cash Flow is. If you were with us last time you learned what an accredited investor was. Till next time, let us keep using fast words. If you change the way you think and talk, you will change your life. Is this the first time you’ve heard the term Phantom Cash Flow?