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An investor owned an office building for the entire year of 2017. The investor purchased the...

An investor owned an office building for the entire year of 2017. The investor purchased the property on January 1, 2017 at a price of $11,585,000 with 20% equity. A total of 73% of the purchase price was allocated to improvements. This year the property had an NOI of $1,135,330. The interest deduction for the first year was $ 535,500.63. The investor is in a marginal tax bracket of 32% what is the investor's tax liability (savings) for the year?

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Answer #1

NOI = $1,135,330

Building cost =  $11,585,000

Portion allocated to improvement = 73%

Value allocated to improvement = Depreciable basis = 73% x  $11,585,000 =$ 8,457,050

MACRS depreciation %age for 1st year for improvement = 1 / 39 = 2.564%

Annual depreciation = Depreciable basis x 1/39 = 8,457,050 x 1 / 39 =  216,847.44

Interest expense= $ 535,500.63

Hence, pre tax income = NOI - Annual depreciation - interest = 1,135,330 - 216,847.44 - 535,500.63 =  382,981.93

Marginal tax rate = 32%

Tax liability for the year = 32% x  382,981.93 = $  122,554.22

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