76 what is the value of the deduction during 1 year

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Unformatted text preview: 00 of RE Gains Exempt from Personal Taxes Never Pay if Use Capital Gains to Purchase More Expensive Property (called a 1031 Exchange) DEPRECIATION ALLOWANCES 41 Buildings “depreciate” over time IRS views this as a legitimate cost of doing business The actual rate of decay is unobserved Congress sets rates of decay for tax purposes Current Method – Straight line Method Determine property’s depreciable basis & tax life • • Depreciable Basis = virtually everything minus the land 27.5 year for residential and 39 for non residential bldgs Annually Deduct that amount multiplied by: 1 1 Straight line rate 3.63% tax life 27.5 Dr. Eriksen 13 Real Estate Fundamentals Texas Tech University Lesson 10: RE Investment DEPRECIATION ALLOWANCES 42 For Example…. Apartment Building Cost $1m to construct Tax Life = 27.5 years Able to Deduct $36,360 per year from Taxable Inc. Generous Allowances can create negative taxable income (commonly called tax shelter) Possible tax shelters to offset positive gains from other business activities Congress currently taxes gains from depreciation at 25% in a VERY complicated manner Dep Allowance for $100k Apartment Nominal Value of Deduction 43 Depreciation Deductions $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 1 6 11 16 21 Years After Construction 1981 1986 Double Decline Method 15 Year tax Life PV = $28,395 26 Post 1986 Straight Line Method 27.5 Year Tax Life PV = $9,404 Low Income Housing Tax Credit 44 Perceived Shortage of “Affordable Housing” Affordable to Whom? Income v. Supply Issues? 1986 Tax Reforms Removed Generous Depreciation LIHTC = Targeted Subsidy to Lower Income Impose Max Rent Ceilings and Income Restrictions Apartment Developers Receive 30 91% Subsidy Subsidy Paid in Form of Tax Credits Developers Sell Tax Credits to Private Companies Most Likely “Crowds Out” Unsubsidized Developers Dr. Eriksen 14 Real Estate Fundamentals Texas Tech University Lesson 10: RE Investment IN THIS LESSON: 45 Learned How to Calculate IRR and NPV Identified Potential Problems with IRR Calculated How Debt Affects Risk and Returns Increases Volatility of Cash Flows Learned How Taxes Affect Investment Decisions Favor Real Estate Over Other Types of Investment Dr. Eriksen 15...
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This document was uploaded on 03/13/2014 for the course FIN 3332 at Texas Tech.

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