Problem 3. ATCF from Building Sale You are selling your building for $18,000,000
ID: 2755570 • Letter: P
Question
Problem 3. ATCF from Building Sale
You are selling your building for $18,000,000, with 4.5% in selling costs. You have take $3,000,000 in depreciation and put 600,000 into capital improvements over the period you owned the building, which you purchased for $15,000,000 and incurred 25,000 in acquisition costs. Your original loan was for 10,500,000 which you took out 5 years ago, with a 5.25% interest rate with a 25 year amortization period. Depreciation recapture tax rate is 28.8% and capital gains tax rate is 23.8%.
What is your selling expense?
What is your net selling price?
What is your loan payoff?
What is your BTCF from sale?
What is your adjusted basis?
What is your gain on sale?
What is your depreciation recapture tax?
What is your capital gain tax?
What is your total tax on sale?
What is your ATCF from sale?
Explanation / Answer
Sale Price of Building = $ 18,000,000
Selling costs = 4.5%
Depreciation = $ 3,000,000
Capital Improvement = $ 600,000
Purchase Price = $ 15,000,000
Acquisition cost = $ 25,000
Depreciation recapture rate = 28.8%
Capital gains tax rate = 23.8%
Loan amount = $ 10,500,000
Loan Period = 25 Years
Remaining Loan Period = 25 – 5 = 20 years
Interest rate = 5.25%
Selling Expense = $ 18,000,000 * 4.5% = $ 810,000
Net Selling Price = $ 18,000,000 * (1-0.045) = $ 18,000,000 * 0.955 = $ 17,190,000
Balance loan outstanding = Loan amount * [(1+0.0525)^25 – (1+0.0525)^5}/[(1+0.0525)^25-1]
= 10,500,000 * [3.5937893 – 1.29154791]/[3.5937893-1]
= 10,500,000 * (2.30224139/2.5937893)
= 10,500,000 * 0.8875976896
= $9,319,775.74
Loan payoff amount = $ 9,319,775.74
Before Tax Cash Flow from Sale (BTCF) = Sale value – Selling Expenses – Loan pay off
= $ 18,000,000 - $ 810,000 - $ 9,319,775.74
= $ 7,870,224.26 or $ 7,870,224 (rounded off)
Calculation of Adjusted Basis
Adjusted basis = Purchase price + acquisition cost +capital improvement expenses + Selling costs – Accumulated deprecation
Adjusted Basis = $ 15,000,000 + $ 25,000 + $ 600,000 + $ 810,000 - $ 3,000,000
Adjusted Basis = $ 13,435,000
Gain on Sale = Sale Price - Adjusted Basis
=$ 18,000,000 - $ 13,435,000 = $ 4,565,000
Depreciation recapture tax = Depreciation amount * tax rate = $ 3,000,000 * 28.8%
= $ 864,000
Capital gains tax = ($ 4,565,000 - $ 3,000,000) * 23.8% = $ 1,565,000 * 23.8%
= $ 372,470
Total Tax on sale = Depreciation recapture tax + capital gains tax
= $ 864,000 + $ 372,470
= $ 1,236,470
After tax cash flow from sale = Before tax cash flow from sale - total tax paid
= $ 7,870,224 - $ 1,236,470
= $ 6,633.754
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.