- 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% and the long-term capital gains tax rate is 20%. The equity reversion after taxes for this property is closest to: A) $384,400. B) $365,600. C) $449,400. Your answer: B was incorrect. The correct answer was A) $384,400. I just dont understand this, can someone please explain? 2)Suppose you are evaluating an investment opportunity in an office building for which you have estimated the following financial characteristics: First year net operating income (NOI) = $75,000. Growth rate in net operating income = 5% per year. Tax depreciation = $10,000 per year. Annual interest expense = $9,000. Annual total debt service expense = $12,000. Equity investors marginal income tax rate = 36%. Investment horizon = four years. The cash flows after taxes for years one and four are closest to: A) CFAT1 = $51,480 and CFAT4 = $50,766. B) CFAT1 = $42,840 and CFAT4 = $50,406. C) CFAT = $42,840 and CFAT4 = $47,760. Your answer: C was incorrect. The correct answer was B) CFAT1 = $42,840 and CFAT4 = $50,406.
- 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% and the long-term capital gains tax rate is 20%. The equity reversion after taxes for this property is closest to: A) $384,400. B) $365,600. C) $449,400. Selling Price: 850 Sales Cost: 65 ============= Net selling price=785 Purchase Price: 550 Accum Depr: 20*6=120 Book Value: 430 Capital Gains = 785 -430 - 120 (Recaptured Deprn) = 235 Capital Gains tax = 235 * .2 = 47 Recaptured Depreciation Tax: 120 * .28 33.6 Total Tax: 80.6 ERAT: 785 - 320 - 80.6 = 384.4
CPK if you see the schweser example, for calc cap gains (not recaptured dep) in the case of appreciation, they have just taken gross selling price - gross purchase price. in this case, that would be 850-550. what say?
that is fine if you do know for a fact that there is capital gains for sure. The above is the right way to do it. You take of 120 twice… in the method above - which is good in case you are not able to sell at a profit.
Question number please?
that’s good, coz net selling price - book value * tax on depreciation and no cap gains tax is what i use if it decreases in value. i thought the fact that 850 or even 850-65 was enough to know that it is greater than the purchase price of 500 or 500-120 i.e. cap gain exposure.
I get A for number one. Question 2 I get 42,840 for year 1 but get $53,184. dont have note is front of me. what am i doing wong? Year 4 operating income 91,162 (less) interest and dep (19,000) = 72,162 taxes paid = 25,978 CFAT = 91,162 - 25,978 - 12,000 = 5,3184
2nd problem: CFAT = NOI – debt service – taxes payable Taxes payable = (NOI – Int – Dep)(T) Taxes yr 1 = (75,000 – 9,000 – 10,000)(.36) = 20,160 CFAT 1 = 75,000 – 12,000 – 20,160 = 42,840 Taxes yr 2 = (75,000*1.05^3 – 9,000 – 10,000)(.36) = 24,415.875 CFAT 4 = 86,821.875 – 12,000 – 24,415.875 = 50,406 B
Mcgrey, NOI@4 = NOI@1 * (1.05)^3 ==>Thats where you went wrong!
thanks. i used 1.05^4, hence my error…