For the following questions, use these assumptions: N.O.I. $80,000 Cap Gains Tax
ID: 2785067 • Letter: F
Question
For the following questions, use these assumptions: N.O.I. $80,000 Cap Gains Tax Rate 20 % Current Market Cap Rate 8% Recapture Tax Rate 25 % Loan Amount $ 750,000 Ordinary Tax Rate 33% Interest Rate 6 % Principal Payment Annually $3,000 1. What is the estimated value of this property? 2. If the value is $900,000, what is the loan to value ratio? 3. What is the cash flow after debt service before taxes? 4. If the value increases to $950,000 in one year from an original value of $900,000, what is the total cash on cash return if the property is purchased with cash (all-equity investment) and no debt? 5. What is the leveraged total return (return on cash invested) with the loan in place above and an original value of $900,000 that has appreciated to $950,000? 6. If depreciation expense for year 1 is $35,000 what is the taxable income (loss)? 7. If the property is sold for $1,200,000 in 10 years, there are not any additional capital improvements and the original cost is $900,000, what is the taxable gain on sale? (Use the above deprec expense)
Explanation / Answer
NOI = 80,000
capital gains tax = 20%
current market cap rate = 8%
Loan amount = 750,000
interest rate = 6%
annual principal payment = 3000
recapture rate = 25%
ordianry tax rate = 33%
taking these into consideration
1) estimated value of this property
= NOI/ market cap rate = 80,000/0.08 = 1,000,000
2) Loan amount = 750,000
new value = 900,000
Loan to value ratio = 750,000/900,000 = 0.83333 = 83.33%
3)
debt charges = interest paid +principal paid = 750,000 * 0.06 + 3000 = 48,000
hence after debt service cash flow = NOI - debt charges = 80,000 - 48,000 = 32,000
4)
total return = income retun + growth or appreciation return
income return = 80,000/900,000 = 0.0889 = 8.89%
growth or appreciation return = (950,000 - 900,000) / 900,000 = 0.0556 = 5.56%
total return = 8.89 + 5.56 = 14.45 %
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