Question

You have invested in and held onto an apartment building for 5 years. Now it is time to exit the investment and sell the property. You have the following information about the property:

1. The NOI in Year 5 was $150,000. The projected NOI in Year 6 is $165,000.
2. You acquired the property for $1,500,000.
3. The going-out capitalization rate is 8.5%
4. At the end of five years, the balance out-standing on the mortgage you used to finance the property is $1,300,000.
5. You did not engage in any capital expenditure over the last five years. Neither was there any cash transferred to a capital expenditure reserve.
6. The property is depreciated on a straight-line basis for 27.5 years. The accumulated depreciation is $297,792.
7. Assume that capital gains are taxed at 15%, while depreciation recapture is taxed at 25%.
8. Assume there are no selling expenses.
   

Compute the After Tax Cash Flow from sale of the property (this quantity is also known as After Tax Equity Reversion).

Answer 1

Before Tax Equity Reversion =Resale Price-Sales Cost-Remaining Loan Balance

Projected NOI=$165000

Capitalization Rate=8.5%=0.085

Resale Price=165000/0.085=$1,941,176

Selling Cost=0

Remaining Loan Balance=$1,300,000

Before Tax Equity Reversion =$1,941,176-$1,300,000=$641,176

Book Value of the property=1,500,000-297,792=$1,202,208

Resale Price=$1,941,176

Capital Gain =$1,941,176-$1,500,000=$441,176

Capital Gain Tax=15%*441176=$66,176

Depreciation Recapture=$297,792

Tax on depreciation recapyure=25%*297792=$74,448

Total Taxes=66176+74448=$140,624

After Tax Equity Reversion =$641,176-$140,624=$500,552

After Tax Equity Reversion

$500,552