John presently owns an office building, which is 30 years old, and is considering renovating it.Assume that if John does the renovation, he will be able to obtain a new loan that is equal tothe balance of the existing loan plus 75% of the renovation costs. Assume a five-year holdingperiod. Below is the information about the property and John's estimation if he does therenovation.CURRENTIF RENOVATEDPurchase PriceBuilding ValueLand ValueLoan-to-value ratioRenovation CostInitial Increase in NOI (year 4)Annual Increase in NOIResale Value after holding 5 yearsSelling ExpensesNew Loan:1,000,000400,000800,00020.00%200,0003.00%1,523,0003.00% of sale price75.00%Interest9.00%Term30 yearsInterest RateTermPayments per year11.00%Payments per yearYears since PurchasedCurrent NOI (year 4)Projected Increase in NOIResale Value TodayDepreciable LifeOrdinary income tax ratePrice appreciation tax rateDepreciation recapture tax rate1230 years90,000122.00% per year1,050,00039 years28.00%28.00%28.00%What is the capital gain tax from the property sale by the end of year 8 if John does renovate the property?(Choose the nearest value)O $45,949O $43,077O $60,308O $81,955

Income tax: The income tax refers to the amount that is paid by the taxpayer to the tax authority of…

John presently owns an office building, which is 30 years old, and is considering renovating it. Assume that if John does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus 75% of the renovation costs. Assume a five-year holding period. Below is the information about the property and John's estimation if he does the renovation. CURRENT IF RENOVATED Purchase Price 1,000,000 Renovation Cost 400,000 Building Value 800,000 Initial Increase in NOI (year 4) 20.00% Land Value 200,000 Annual Increase in NOI 3.00% Loan-to-value ratio 75.00% Resale Value after holding 5 years 1,523,000 Interest 9.00% Selling Expenses 3.00% of sale price Term 30 years New Loan: Payments per year Years since Purchased Current NOI (year 4) Projected Increase in NOI Resale Value Today Depreciable Life Ordinary income tax rate Price appreciation tax rate 12 3 Interest Rate 11.00% Term 90,000 Payments per year 30 years 12 2.00% per year 1,050,000 39 years 28.00% 28.00% Depreciation recapture tax rate 28.00% What is the capital gain tax from the property sale by the end of year 8 if John does renovate the property? (Choose the nearest value) O $45,949 ○ $43,077 ○ $60,308 ○ $81,955

John presently owns an office building, which is 30 years old, and is considering renovating it. Assume that if John does the renovation, he will be able to obtain a new loan that is equal to the balance of the existing loan plus 75% of the renovation costs. Assume a five-year holding period. Below is the information about the property and John's estimation if he does the renovation. CURRENT IF RENOVATED Purchase Price 1,000,000 Renovation Cost 400,000 Building Value 800,000 Initial Increase in NOI (year 4) 20.00% Land Value 200,000 Annual Increase in NOI 3.00% Loan-to-value ratio 75.00% Resale Value after holding 5 years 1,523,000 Interest 9.00% Selling Expenses 3.00% of sale price Term 30 years New Loan: Payments per year Years since Purchased Current NOI (year 4) Projected Increase in NOI Resale Value Today Depreciable Life Ordinary income tax rate Price appreciation tax rate 12 3 Interest Rate 11.00% Term 90,000 Payments per year 30 years 12 2.00% per year 1,050,000 39 years 28.00% 28.00% Depreciation recapture tax rate 28.00% What is the capital gain tax from the property sale by the end of year 8 if John does renovate the property? (Choose the nearest value) O $45,949 ○ $43,077 ○ $60,308 ○ $81,955

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter10: Cost Recovery On Property: Depreciation, Depletion, And Amortization

Section: Chapter Questions

Problem 79TPC

See similar textbooks

Similar questions

Anewly built property, containing space fora store and two offices, can be purchased for P1200,000 A prospective buyer estimates that during the next 10 years he can obtain annual rentals of at least P6oo.000 from the property and that the annual Out-of-pocket cisbursements will not exceed P42.000. he belleves that he should be able to dispose of the property at the end of 10 years at not less than P500.000. Annual taxes and insurance will total 2.8% of the first cost. Assume he has Sutficient eguity capital to purenase the property and that the average return he is obtaining from his capital is 30% Would you recommend the investment? a) Use Rate of retum method b) Use payout or payback method
Assume that you are planning to buy a property producing natural resources. You think you will keep the property for the next 23 years. You plan to spend $700 per acre. You will have incurred costs of $11 per acre for the 23 years prior to selling the property. You believe that you will receive $26/acre/year in revenue during the investment period. What price (at time of the future sale) will you need to get for the property under 2 MAR scenarios. (using both 5.8% and 8% as MAR).
Robert Cooper is considering purchasing apiece of business rental property containing storesand offices at a cost of $250,000. Cooper estimatesthat annual disbursements (other than income taxes)will be about $12,000. The property is expected toappreciate at the annual rate of 5%. Cooper expectsto retain the property for 20 years once it is acquired.Then it will be depreciated as a 39-year real-propertyclass (MACRS), assuming that the property will beplaced in service on January 1st. Cooper’s marginaltax rate is 30% and his MARR is 15%. What wouldbe the minimum annual total of rental receipts thatwould make the investment break even?
A newly-built business property, containing space for a store and twooffices, can be purchased for P1, 200, 000. A prospective buyer estimatesthat during the next 10 years he can obtain annual rentals of at least P458,460 from the property and that the annual out-of-pocket disbursementswill not exceed P60, 000. He believes that he should be able to dispose ofthe property at the end of 10 years at not less than P700, 000. Annualtaxes and insurance will total 2.5% of the first cost.(a)Assume he has sufficient equity capital to purchase the property, andthat the average return he is obtaining from his capital is 20%. Wouldyou recommend the investment? Use ROR method.(b)What recommendation would you make if he had to borrow 25% ofthe required capital, on the basis of a 10-year amortization with interestof 18%? Use Annual Worth Method(c)If the entire capital can be obtained by floating bonds at 15% that willmature in 10 years, what would you recommend? Sinking fund interestis 15%. Use ROR…
You have an opportunity to acquire a property from First Capital Bank. The bank recently obtained the property from a borrower who defaulted on his loan. First Capital is offering the property for $200,000. If you buy the property, you believe that you will have to spend (1) $10,500 on various acquisition-related expenses and (2) an average of $2,000 per monthduring the next 12 months for repair costs, etc., in order to prepare it for sale. Because First Capital Bank would like to sell the property as soon as possible, it is willing to provide $180,000 in financing at 8 percent interest for 12 months payable monthly (interest only). Your market research indicates that after you repair the property, it may sell for about $225,000 at the end of one year. Furthermore, you will probably have to pay about $3,000 in fees and selling expenses in order to sell the property at that time. If you wanted to earn a 20 percent return compounded monthly, do you believe that this would be a good…
You have an opportunity to acquire a property from First Capital Bank. The bank recently obtained the property from a borrower who defaulted on his loan. First Capital is offering the property for $200,000. If you buy the property, you believe that you will have to spend (1) $10,500 on various acquisition related expenses and (2) an average of $2,000 per month during the next 12 months for repair costs, and so on, in order to prepare it for sale. Because First Capital Bank would like to sell the property as soon as possible, it is willing to provide $180,000 in financing at 4.25 percent interest for 12 months payable monthly (interest only). Your market research indicates that after you repair the property, it may sell for about $225,000 at the end of one year. Furthermore, you will probably have to pay about $3,000 in fees and selling expenses in order to sell the property at that time. If you wanted to earn a 20 percent return compounded monthly, do you believe that this would be a…
Assume that you purchase a property for $200,000 and it generates annual cash flows of $30,000 in years 1-3; and $45,000 in years 4&5. You are able to sell it at the end of year 5 for $400,000. Calculate the IRR for this investment property.
An investor is considering the acquisition of a “distressed property” which is on Northlake Bank’s REO list. The property is available for $203,400 and the investor estimates that he can borrow $160,000 at 4.5 percent interest and that the property will require the following total expenditures during the next year: Inspection $ 551 Title search 1,102 Renovation 13,000 Landscaping 902 Loan interest 7,251 Insurance 1,851 Property taxes 6,051 Selling expenses 8,000 Required: a. The investor is wonderin
According to the Building Residual Technique, the annual operating income of the building is $26,400. How much money should he be willing to pay when he wants to buy this building over its 30-year economic life, using the plot of land at $75,000 and an interest rate of 11%?
Barbara Thompson is considering the purchase of a piece of business rental property containing stores and offices at a cost of $350,000. Barbara estimates that annual receipts from rentals will be $55,000 and that annual disbursement. other than income taxes will be about $18,000. The property is expected to appreciate at the annual rate of 5%. Barbara expects to retain the property for 20 years once it is acquired. Then it will be depreciated on the basis of the 39-year real-property class (MACRS), assuming that the property would be placed in service on January 1.Barbara's marginal tax rate is 30%, and her MARR is 10%. What would be the minimum annual total of rental receipts that would make the investment break-even'?
The direct capitalization method can be used to quickly value a building. You are evaluating a property that produces gross rent of $524,000 per year with an expected NOI of $247,000 per year. Similar properties have traded with a cap rate of 4.5% and and a GIM of 8.5. What is the value of the subject property based on the direct capitalization method?
You are an employee of University Consultants, Ltd and have been given the following information. You are to present an investment analysis of a new small income-producing property for sale to a potential inventor. The asking price for the property is $8.5 million. You determine that the building was worth $7.225 million and could be depreciated over 39 years (use 1/39 per year). NOls are estimated to be $901,375 for year 1, $900,681 for year 2, $899,962 for year 3, $943,700 for year 4, $961,855 for year 5 and expected to increase by 3.16% thereafter. A fully amortizing 70 percent loan can be obtained at 10 percent interest for 20 years (total annual payments will be monthly payments *12). The property is expected to be sold for $9,360,805 after 5 years. Capital gains from price appreciation will be taxed at 15 percent and depreciation recapture will be taxed at 25 percent. Your ordinary income will be taxed at 35 percent. Assume that there is no selling cost and equity discount rate…