Taxes+-+Chapter+11

Taxes+-+Chapter+11 - 1 TAXES Chapter 11 Lecture 7 2 Recall...

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Unformatted text preview: 1 TAXES Chapter 11 Lecture 7 2 Recall Total Potential Income Less vacancy =effective gross income Less operation expenses =NOI Less Debt service Before tax cash flow How do we figure taxes?? 3 Classification of Real Property from Federal Tax Perspective Owned as a personal residence by individuals Held for resale to others (inventory) dealers/devlopers Held for the use in a trade or business (Section 1231 asset) Held for the production of income or investment (Capital asset) 4 Treatment of Characteristics for Tax Purposes Tax Classification Deprec. Allowance Tax on Gain From Sale Loss from Sale Operating Exp. Deductions Property Tax Deduction Interest Deduction Tax- Deferred Exchange Selling Exp. 1. Personal Residence No Capital Gains Not Deductible No Yes Yes No Yes 2. For sale to Customers No Ordinary Income Ordinary Loss Yes Yes Yes No Ordinary Bus. Income 3. Trade or Business Yes Capital Gains Deductible Yes Yes Yes Yes Deduct. from Sales Price 4. Investment Yes Capital Gains Deductible Yes Yes Yes Yes Deduct. from Sales Price 5 Taxable Income from Operations differs from NOI Only the interest portion of the loan payment is deductible Tax code allows deductions for depreciation . Taxable Income = NOI - Interest - Depreciation Deduction Mortgage deductions Total interest paid per year can be obtained from the mortgage schedule. Loan points = These are interest payments that are paid as a lump sum at the origination date of the mortgage are deductible. They are deductible, however, the deduction must be amortized over the life of the loan for commercial mortgages and refinance residential mortgages. Points associated with the mortgage to purchase a home are fully deductible on the tax year in which they are incurred. 6 Determining Payments Recall Monument Office Building Example: Initial Principal $5,950,000Contract Rate10%Maturity 20 years paid monthly (240 Months)Payment$57,418.79/month; $689,025/ year Determining Payment Calculation Solution: N = 20 x 12 = 240 I = 10 12 = .8337 PV = - 5,950,000 FV = 0 Solve for Payments: 57,418.79 Month x 12 $689,025 Annual Payment Input Display 20gn 240 10gi .8337 5,950,000chs PV-5,950,000 0 FV PMT 57,418.79 x 12 $689,025 7 Payment Calculation 8 Commercial Building Mortgage Schedule (End of Year - Annuals of Monthly Payments) 1 2 3 4 5 Annual Payment $689,025 $689,025 $689,025 $689,025 $689,025 Interest Payment $590,569 $580,259 $568,869 $556,288 $542,388 Prin. Payment $98,457 $108,767 $120,156 $132,738 $146,637 Mortgage Balance (V t ) $5,851,543 $5,742,776 $5,622,620 $5,489,883 $5,343,245 Determining Loan Balance 9 What is Loan Balance after 1 year Input Display 19gn 228 10gi .833 57,418.79 Chs Pmt-57,418.79 0 FV PV 5,851,543 10 Determining Loan Balance Therefore Principal Reduction in Year 1 : 5,950,000-5,851,543 98,457 Principal Portion Interest Portion : Total Payment: 689,025 Less Principal Reduction 98,457 Balance: 590,569 11 Original Cost Basis: The initial period purchase price of the real estate asset (cost of land and improvements, acquisition and installation fees). 12...
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Taxes+-+Chapter+11 - 1 TAXES Chapter 11 Lecture 7 2 Recall...

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