Question

Mr. Goldman has owned a plot of vacant land as an investment for six years. The land has a basis of $600,000. Mr. Goldman is now considering disposing of the land. A buyer has offered Mr. Goldman the opportunity to engage in a qualified § 1031 like-kind exchange in which the buyer will give Mr. Goldman a different piece of land with a fair market value of $725,000 plus $20,000 cash in the current year. If Mr. Goldman accepts the buyer’s offer, he expects to hold the new land for two years at which time he expects to sell the new land for $830,000.

Any recognized gains on the above transactions would be taxed at Mr. Goldman’s long-term capital gains tax rate of 15%. Mr. Goldman uses a discount rate of 7% in his NPV calculations. Calculate the total NPV of Mr. Goldman’s post-tax cash flows from his exchange and subsequent sale of land.

Answer 1

Calculation of NPV of post tax cashflow
Year	0	1	2
Initial Investment	-600000
Cash Receipts	20000
Tax	-18750 (725000-600000)*15/100
Sale Value			830000
Net Cashflow	-598750 (-600000+20000-18750)	0	830000
Discountig Factor	1	0.935	0.873
Present Value	-598750 (net cashflow * Discounting Factor)	0	724954.1
NPV	126204.1
*As the exhange runs in the current year itself the discount factor used should be 1
*While the npv calculations only cashflows are considered so the increase in land value due to exhange won't be considered as it is a non cashflow, while incrimental tax due yto the capital gain should be deducted.