Question

Suppose you purchase a $300,000 condominium for your personal residence putting down 3% and borrowing the balance at a rate of 3.5% for 30 years. If you move in on July 1 of 2021, approximately how much of a tax deduction can you take for the tax year 2021 assuming you itemize your deductions and are not subject to any SALT limits? How does this change the after-tax cost of your mortgage? Show all calculations.

Consider a 4-unit residential property for sale for $1.2 million in which all units rent for $2,500 per month.    If vacancy and collection losses are 5% of GPI and operating expenses are 40% of EGI, what is the annual NOI?    If you finance the property with a 75% LTV mortgage at a rate of 4.00% fully amortized over 30 years and assign $375k of the purchase price to the underlying land, what will be your taxable income during the first full year of ownership?   Assume the property is placed in service on Jan 1 and your make 12 monthly mortgage payments during that year.   Show all calculations.

Answer 1

The tax deduction for the 2021 tax year would be $2,475. This would reduce the after-tax cost of the mortgage by $87.

 

WORKING

3% down on a $300,000 condominium is $9,000. 

 

The balance borrowed at 3.5% for 30 years is $291,000.

 

The monthly mortgage payment would be $1,295.83.

 

The interest paid in 2021 would be $2,475. This would be the tax deduction for the 2021 tax year.

 

The after tax cost of the mortgage would be $87 less than the monthly mortgage payment due to the tax 

deduction.

 

Consider a 4 unit residential property for sale for $1.2 million in which all units rent for $2,500 per month.If vacancy and collection losses are 5% of GPI and operating expenses are 40% of EGI, what is 

the annual NOI?

ANSWER

The annual NOI would be $117,500.

 

WORKING

There are 4 units, each renting for $2,500 per month.

The monthly rent income would be $10,000.

The annual rent income would be $120,000.

The vacancy and collection losses would be 5% of GPI, or $6,000.

The operating expenses would be 40% of EGI, or $48,000.

The annual NOI would be $117,500.

 

If you finance the property with a 75% LTV mortgage at a rate of 4.00% fully amortized over 30 years and assign $375k of the purchase price to the 

underlying land, what will be your taxable income during the first full year of ownership?   Assume the property is placed in service on Jan 1 and your make 12 monthly mortgage payments during that year.   Show all calculations.

ANSWER

The taxable income during the first full year of ownership would be $49,875.

 

WORKING

The purchase price is $1.2 million.

The loan amount would be 75% of the purchase price, or $900,000.

The interest rate is 4.00%.

The monthly mortgage payment would be $4,144.09.

The interest paid in the first year would be $33,152.
The taxable income during the first full year of ownership would be $49,875.