Question

You acquired a building for $100 million and financed the acquisition with a $75 million interest-only loan. Three years later, you sold the property for $120 million. Assume 70% of the property was attributed to structure and that the structure was depreciated over a 39-year period. Also assume that capital gains are taxed at 15% and that accumulated depreciation is taxed at 25%. Also assume a 3% sales cost for the building and no prepayment penalty for the loan. What would be your net profits?

Answer 1

Calculation of Net profits

Purchase cost of building :     $100 million

Total cost =                 $100 million

Property sold at $120 million

Profit =        $120 million - 100 million

         = $20 million

The depreciation is provided on 70% of the building as it is a structure, so it amounts to $70 million.

The accumulated depreciation is = $70 million / 39 years * 3 years

                                               = $5.3846 million

Accumulated depreciation is taxed @ 25 %, hence 25% of $5.3846 million = $1.3461 million

Capital gain = Profit - tax on accumulated depreciation - sales cost @ 3%

                  = $20 million - $1.3461 - $3.6 million

Capital gain = $15.05

Capital gain is taxed @ 15% = $15.05 * 15% = $2.25 million

Net Profit = Capital gain - tax on capital gain

= $15.05 million - $2.25

= $12.8 million.