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Lu Holder planned to buy a rental property as an investment




Lu Holder planned to buy a rental property as an investment. After looking for several months, she found an attractive duplex that could be purchased for $93,000 cash. The total expected income from renting out both sides of the duplex would be $800 per month. The total annual expenses for property taxes, repairs, gardening, and so on are estimated at $600 per year. For tax purposes, Lu plans to depreciate the building by the SOYD method, assuming that the building has a 20-year remaining life and no salvage value. Of the total $93,000 cost of the property, $84,000 represents the value of the building and $9,000 is the value of the lot (only the former can be depreciated). Assume that Lu is in the 38% incremental income tax bracket (combined state and federal taxes) throughout the 20 years.;In this analysis, Lu estimates that the income and expenses will remain constant at their present levels. If she buys and holds the property for 20 years, then what after-tax ROR can she expect to receive on her investment, using the assumptions noted below?;a. The building and lot can be sold at the end of 20 years for the $9,000 estimated value of the lot.;b. A more optimistic estimate of the future value of the property is that it can be sold for $100,000 at the end of the 20 years.


Paper#34240 | Written in 18-Jul-2015

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