Walt Hubble is contemplating selling rental property that originally cost $200,000. He believes that it has appreciated in value at an annual rate of 6% over its 4-year holding period. He will have to pay a commission equal to 5% of the sale price to sell the property. Currently, the property has a book value of $137,000. The mortgage balance outstanding at the time of sale currently is $155,000. Walt will have to pay a 15% tax on any capital gains and a 25% tax on recaptured depreciation.
a. Calculate the tax payable on the proposed sale.
b. Calculate the after-tax net proceeds associated with the proposed sale, CFR.
a.
Answer : 21,730.59.
Calculation:
Information provided in the question:
| Original Cost | 200000 |
| Book Value | 137000 |
| Annual Appreciation Rate | 6% |
| Sales Commission | 5% |
| Tax on recaptured depreciation | 25% |
| Tax on any capital gains | 15% |
| Outstanding Mortgage Balance | 155,000 |
| Year | Value | Calculation |
| 1 | 212000.00 | [=200000+(200000*6%)] |
| 2 | 224720.00 | [=212000+(212000*6%)] |
| 3 | 238203.20 | [=224720+(224720*6%)] |
| 4 | 252495.39 | [=238203.2+(238203.2*6%)] |
| Forecast Sale Price: | 252495.39 | |
| Selling Commission: | 12624.7696 | [=252495.39*5%] |
Tax Payable on the Proposed Sale:
| Forecast Sale Price | 252495.39 |
| Less: Selling Commission | 12624.76 |
| Less: Book Value | 137000 |
| Total Gain on Sales | 102870.62 |
| Capital Gain | 39870.62 | [=252495.39-12624.76-200000] |
| Recaptured Depreciation | 63000 | [=200000-137000] |
| Tax on Recaptured Depreciation | 15750 | [=63000*25%] |
| Tax on Capital Gain | 5980.59 | [=39870.62*15%] |
| Taxes Payable | 21730.59 |
b.
Answer: 63,140.03
Calculation:
| After-Tax Net Proceeds (CFR4)= | 63140.03 | [=252495.39-12624.76-155000-21730.59] |
Walt Hubble is contemplating selling rental property that originally cost $200,000. He believes that it has...