Definition:
Before-tax income is the total earnings or income an individual or business generates before taxes are deducted.

Example:
If Sarah earns $5,000 per month, this amount represents her before-tax income. After deductions for taxes and other withholdings, her actual take-home pay (after-tax income) might drop to around $3,800.

Explanation:
In real estate, before-tax income is often used by lenders to evaluate mortgage eligibility and affordability. When applying for a mortgage, lenders consider your gross (before-tax) income, not your net or after-tax income, to determine how much you can afford to borrow. This income measure includes salary, bonuses, commissions, rental income, investment earnings, and other regular income sources.

Real estate investors also use before-tax income to analyze property performance, calculating potential returns before considering tax implications.

Importance:
Understanding before-tax income is essential because mortgage lenders base affordability and loan limits on this figure. Buyers should clearly understand their before-tax income to gauge realistic borrowing power, budgeting accurately to avoid financial stress. Sellers benefit by knowing buyers’ before-tax income to assess the likelihood of a smooth transaction and whether prospective buyers qualify financially.

In short, clarity about before-tax income allows buyers, sellers, and investors to make sound financial decisions, ensuring realistic budgeting, better loan terms, and smoother real estate transactions.