Question

5. Kimberly has a retail clothing store that makes a net operating income (NOI) of $300,000. She originally purchased the property for $2,500,000 and places $500 a month into escrow for replacement reserves. She estimates the land value to be $400,000. She received a mortgage for $1,625,000. The payments each month include principal and interest during year 2 of $45,909 and $88,229 and during year 1 of $56,843 and $99,651 respectively. What is the depreciation for year 1 and 2? 6. Following up on question 5, what does Kimberly pay in taxes year 1 and year 2 if her tax rate is 28%? I

Answer 1

Question (05)

Particulars	Amount
Rate of Depreciation as per US Residential Property Rental	3.636%
Book Value of Asset Capitalized	2,500,000.00
Less: Depreciation for the Year 1	90,900.000
Written Down Value at the end of Year 1	2,409,100.00
Less: Depreciation for the Year 2	87,594.88
Written Down Value at the end of Year 2	2,409,100.00
Depreciation for the Year 1	90,900.00
Depreciation for the Year 2	87,594.88
Total	178,494.88

Notes

1. Land is not depreciable asset hence no depreciation on land.

2. It is assumed that value of land is not included in the value of property.

Question No 6

Particulars	Amount	Amount
Net Operating Income	300,000	300,000
Less: Depreciation	90,900	87,595
Interest	99,651	88,229
Net Operating Income after Depreciation and Interest (Taxable)	109,449	124,176
Rate of Tax	28%	28%
Tax to be Paid	30,646	34,7

Notes

1. Only interest is allowed as deduction from the NOI for determining tax payable.

2. Principal portion is not allowed as a deduction it can be capitalized and claim depreciation

3. Its is assumed that NOI is same for both the years as there is no other information.

4. Amount transferred to escrow account for replacement reserve is not allowed as a deduction.