Misc income vs. taxable savings - one-time cash flow

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eric
Posts: 35
Joined: Wed Apr 20, 2016 6:06 pm

Misc income vs. taxable savings - one-time cash flow

Post by eric »

I need to model the sale of an investment property on some future date. I assume that the proceeds will go into a taxable savings account.

I'm unsure how to model this. It seems to me that I have a choice of showing it either as a Misc Income, or as Taxable Savings. Is that right? But what's the difference? Why would I model it as one, vs. the other? Which is preferable?

Thanks.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Misc income vs. taxable savings - one-time cash flow

Post by jimr »

Both approaches will end up yielding very similar results.

Creating an income cash flow lets you specify a taxable percent and have the planner automatically deduct taxes (at the income tax rate).

Modeling it using a taxable savings cash flow keeps the transaction separate from the income/expense calculations, which may appear cleaner in the results table.

One minor note is that logically inside the simulation, income cash flows happen at the beginning of the year, while investment cash flows happen at the end of the year. That means that if you model the cash flow as income, the funds will earn an extra year of returns compared to if you model it as a savings cash flow.
eric
Posts: 35
Joined: Wed Apr 20, 2016 6:06 pm

Re: Misc income vs. taxable savings - one-time cash flow

Post by eric »

Understood. Thanks.

But that raises another question. If I treat the sale of the investment property as Misc Income, how does FRP treat the proceeds? Are they treated as taxable savings thenceforth?

I guess that's just a specific instance of a more general question of what happens in any year that income exceeds expenses.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Misc income vs. taxable savings - one-time cash flow

Post by jimr »

any excess income in a given year is placed in the taxable portfolio.
eric
Posts: 35
Joined: Wed Apr 20, 2016 6:06 pm

Re: Misc income vs. taxable savings - one-time cash flow

Post by eric »

Thanks.
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