I don’t get it, in the Douglas Manor Apartments example (Reading 47) when calculating the After Tax Equity Reversion, Depreciation is deducted twice. Firstly, it is deducted from Purchase price then it deducted from gain on the sale. Why is this so? There is no explantion as to why this was done. Please help understand the logic here!
The difference is down to whether the property is sold for more or less than the original purchase price, have another look, bearing that in mind…
Here is how I would like to think about it. In the douglas example, you have an asset at a book value of 459,404 but you are able to sell it in the market for a net of 723,469 that is a 264,065 gain but wait, in reality 198,469 of it is true gain (723,469-525000, sales price-orginal price) the rest appears to be a gain cause you depreciated more than you should have, in theory you should not have depricated at all cause you sold it for more than original value, never the less accounting rules required that you depreciate… that extra depreciation saved you tax in the past =dep(t) so you should pay it back in addition, you should pay a higher tax rate than the regural rate, i would like to think of it as conpensation to the gov because you are paying them taxes later than you should have… so the 65596 which should have never depreciated (again in theory, accounting requires that it is), it must be taxes at a higher rate than the 198469 i hope this helps sorry if messy, i always log in via phone
also to more directly answer question the first time accumlated dep was subtracted so we can get book value, nothing more now that we have that book value of 459404 we did 723469 - 459404 = 264065 to get the gain on sale now we subtract the dep out of it because it has to be treated in a diff way like i said in the previous post then we are subtracting each “type of gain” after multiplying it by the tax rate applicable to that type of gain ------------------ has the sale price been 509404 your gain is 509404-459404=50000 since that 50,000 is the than the dep, it is all recapture dep and you pay tax of (509404-459404)*0.25 nothing to be paid in the 0.2 bracket, because no capital gain ------------------- has the sale price been 459404 you pay nothing in taxes ------------------ so this covers all 3 possible events
actually these is one condition i did not cover, and it does not seem that you are required to know it if your sale price is bellow BV, ie sales price of 409404 you have a loss of 549404-4094-4=50000 i hope someone with more accounting know how can tell us how the authorities would treat that. would say allow you to pay=50000*0.2 less in taxes assuming your taxes from opparations are greater than this? would they give you 50000*0.2 in cash no mater what you other taxes are? would they allow you to deduct it from your taxes in future years ?
Now I get it!!?! Thanks guys!