Equity Reversion

A property was purchased for \$550,000 and sold after six years for \$850,000. Costs associated with the sale were \$65,000 and the tax depreciation in each year was \$20,000. At the time of the sale, \$320,000 remained outstanding on the mortgage. The tax rate on recaptured depreciation is 28 percent and the long-term capital gains tax rate is 20 percent. The equity reversion after taxes for this property is closest to: A) \$384,400. B) \$365,600. C) \$449,400. D) \$569,200.

A.

ugh - this is my first erat attempt - what did i do wrong dubbs?

I am not sure I am right. I will post my calc.

PP = 550K NSP = 850000 - 65000 = 785K Total TD = 20K*6 = 120K MB = 320K Cap gains = 235K Cap Gain Tax Rat = 20% Cap Gains Tax = 47K Recap Depr = 120K Rec Tax Rate = 28% Rec Tax = 33.6 Ans = 785 - 320 - 33.6 - 47 = 384.4 = A?

wanderingcfa Wrote: ------------------------------------------------------- > A property was purchased for \$550,000 and sold > after six years for \$850,000. Costs associated > with the sale were \$65,000 and the tax > depreciation in each year was \$20,000. At the time > of the sale, \$320,000 remained outstanding on the > mortgage. The tax rate on recaptured depreciation > is 28 percent and the long-term capital gains tax > rate is 20 percent. The equity reversion after > taxes for this property is closest to: Net selling cost is 850-65=785 Recaptured depreciation is 20*6=120*.28=33.6 Capital gain=785-550=235*.2=47 Mortgage payoff is 320 ERAT=785-33.6-47-320=384.4

calculate taxes to pay: cap gains = (selling price - selling costs - price paid) * cap gains rate = 47,000 recaptured depr tax = 120,000 * .28 = 33,600 So Net proceeds from sale of 785,000 - 47,000 - 33,600 - 320,000 mortgage bal = 384.4 why did i put C… I meant A!

Looks good to me.

Yup, A it is. I just liked the question and thought I would share :).

For some reason I skipped over this section in the CFAI and in Schweser… should be good for one easy point on June 7 if we can just lock this formula up.

wanderingcfa Wrote: ------------------------------------------------------- > Yup, A it is. > > I just liked the question and thought I would > share :). Good practice. Thanks.

Thanks for a refresher - wanderingcfa ! We need more like these…

good reminder i have to review real estate.

it’s A (in 1000s) first calculate the taxes to be paid: recaptured depreciation: (20x6)x.28 = 33.6 applicable capital gains tax: [(850-65) - (550-120) - 120]x.20 = 47 total taxes = 80.6 ERAT: 785 - 310 - 80.6 = 384.4

damn i type too slow