Question

8. Specifics of real estate investment - Tax liability and leveraging Aa Aa E Making Real Estate Investments Real estate has been a lucrative investment for many years. Real estate provides greater diversification properties as compared to equity or fixed-income investments. Two important benefits to investing in real estate are the abilities to leverage investments and to decrease tax liability. Consider Frances's case: In 2011, Frances has an adjusted gross income from one job of $40,000 (not including any deductions from real estate loss). In addition, Frances owns an apartment building that she rents out throughout the year. The revenues she received from her apartment building amounted to $120,000 in rent payments for the year. The operating expenses (maintenance, mortgage interest, and so forth) amounted to $72,000 for the year. Her income (before subtracting depreciation expenses) for the apartment building is therefore (her rental income minus her expenses). Her accountant has informed her that the apartment building can be depreciated upto $54,000 for tax purposes in 2011; therefore, she can subtract of the depreciation expense from her rental income (and thus not pay taxes on that amount) and of the depreciation amount against her ordinary income. Suppose Frances is interested in purchasing an additional apartment building as an investment. She has $60,000 in cash and can borrow an additional $150,000 at an annual interest rate of 9% to purchase a property costing $210,000. If the property is expected to generate $25,200 per year after expenses, then the benefit from leveraging the investment the cost of paying interest on the loan.

drop down 1&2 - 48,000 , 54,000 or 6,000

drop down 3- the remaining 6,000, 50% of the remainder, the remaining 48,000

drop down 4- does not outweigh, outweighs

Answer 1

1. Her income would be

=120000-72000

= 48,000

2. ...subtract 48,000 of the depreciation... (i.e. equal to her net income from the apartment)

3. the remaining 6000

4. Outweighs (As the return she would get i.e. 25,200/210,000 = 12% is higher than 9% to purchase. Further, tax benefits from interest expense would also be there.)