taxes and property

CFA Level II
#1
  1. In the band of investment why doesnt the cost of debt account for the tax rate, like in other readings? I would think that if the tax effect wasnt accounted for in weighted rate(denominator), then it should be accounted for in net operating income(the numerator). But NOI is before taxes. Therefore the tax effect is ignored? 2) Please refer to Question 4 on P42 of V5- In the vignette, Salazar is discussing the effect of higher taxes, which arent included in either gross income or NOI. However, the answer emphazises how the DC approach considers costs. The point I’m making is that the DC approach still ignores taxes, just like the GIM approach. Thus,shouldnt the values derived from both methods should be equal?
#2

My reasoning is that since we are looking at deriving market values, as opposed to “costs” with either approach, taxes are ignored at this level. After the transaction with the derived market value is made, taxes will come into play, borne by the seller for gains or losses.

#3

Which tax rate do you want to use? Income tax rate or recaptured depreciation tax?

#4

Income tax rate. recaptured depreciation tax is specifically for recaptured depreciation

#5

spartan1 Wrote: ------------------------------------------------------- > Income tax rate. recaptured depreciation tax is > specifically for recaptured depreciation The DC approach considers taxes when you calculate NOI, so I don’t know how you came to that conclusion. Since property 3 has a higher tax rate, it’s value will be less than its comps because its NOI is lower. If you use GIM, it’s value will be higher because it ignores taxes.

#6

bpdulog Wrote: ------------------------------------------------------- > spartan1 Wrote: > -------------------------------------------------- > ----- > > Income tax rate. recaptured depreciation tax is > > specifically for recaptured depreciation > > The DC approach considers taxes when you calculate > NOI, so I don’t know how you came to that > conclusion. Since property 3 has a higher tax > rate, it’s value will be less than its comps > because its NOI is lower. If you use GIM, it’s > value will be higher because it ignores taxes. Actually, scratch that bit about taxes for a minute. NOI includes property taxes, but not income taxes.