Question

An investor bought a property 3 years ago for Sh, 500,000 of which 20% was cost of land. The building is depreciated on a straight-line basis over 20 years. The property can be sold today for Sh. 800,000. The loan outstanding today is Sh. 280,000. The capital gain tax on price appreciation is 20% and 25% on depreciation recapture.Calculate the after tax cash flow from the sale of the property.

Answer 1

The cost of the property = 500,000

Cost of Land = 20% of Property = 0.20* 500000 = 100000

Cost of Building = Total cost - cost of land = 500000 -100000 = 400000

A Price of the property after 3 years = 800000

Appreciation of the property = Sale value of property - Historical cost =  800000 - 500000 = 300000

Portion of Land in sale value of property = 800000* 0.20 = 160000

Portion of building in the sale value of the property = 640000

Depreciation per year= Cost of the building / useful life

= 400000 / 20 = 20000

Adjusted cost basis of building = Historical cost - Depreciation for 3 years

= 400000 - 20000*3

= 400000 - 60000 = 340000

Depreciation Recapture = Sale value - Adjusted cost basis = 640000 - 340000 = 300000

B. Capital gain Tax = Appreciation * capital gain tax rate = 300000*0.20 = 60000

C Tax on Depreciation recapture = 300000 * 0.25 = 75000

D Loan Outstanding = 280000

After tax cash flow from sale of property = A -B - C -D

= 800000 - 60000 - 75000 - 280000

=SH 385,000