Question

you bought some land for $1,200,000 your plan is to build an apartment building for $1,300,000 which will provide you with rental revenue of $500,000 per year depreciation is straight line with a 30 year life and no salvage The tax rate is 34% an ordinary income and 20% on capital gains what will you need to sell the apartment for before taxes in 15 years to earn a 15% after tax return?

Answer 1

Annual Rental Revenue = $ 500,000

Annual Depreciation deduction = ($ 1,300,000 - 0) / 30 = $ 43,333.33. (Land is a non-depreciable Asset)

Annual Taxable Ordinary Income = $ 500,000 - $ 43,333.33 = $ 456,667.

Annual Return after tax @ 34% = $ 456,667 - 34% = $ 301,400.

For 15 years = $ 301,400 * 15 = $ 4,521,000.

Required return after tax per year = 15% of (1,200,000 + 1,300,000) = $ 375,000.

For 15 years = $ 375,000 * 15 = $ 5,625,000.

Thus, after tax gain required on sale of apartment in 15 years = $ 5,625,000 - $ 4,521,000 = $ 1,104,000.

Hence, before tax capital gain = $ 1,104,000 / 80% = $ 1,380,000.

WDV of apartment after 15 years (at time of sale) = 2,500,000 - (43,333.33 * 15) = $ 1,850,000.

Hence, required sales price of apartment = $ 1,380,000 + $ 1,850,000 = $ 3,230,000.

Hence, we will need to sell the apartment before taxes in 15 years to earn a 15% after tax return for $ 3,230,000.