Use the following information to answer the following two questions. You are making a 10-year cash flow pro-forma for a lender, on a non-residential commercial building which you have just purchased (on January 1) and plan to own for 10 years (the maturity of the loan you are requesting). The building has a single tenant in a 20-year lease that commenced at the time of building purchase (January 1).
-Purchase Price: $3,000,000 including $500,000 in assessed land value.
-Tenant Improvement Expenditures (all spent on building made at time of purchase, beginning of lease): $1,000,000.
-Leasing Brokerage Commission (paid at time of purchase, beginning of lease): $300,000.
-Capital Gains Tax Rate (on economic gain): 15%.
-Recapture Tax Rate: 25%.
-Ordinary Income Tax Rate: 35%.
Be completely realistic in your treatment of all sources of capital gains and recapture tax.
-By how much would the tax on the reversion increase (looking only for the increment here) if the projected net resale proceeds were $4,500,000 instead of the $4,000,000 of the previous question?
A) $75,000.
B) $105,000.
C) $175,000.
D) $225,000.
E) None of the above.

Question

Quizplus · Accepted Answer

The increase in projected net resale proceeds from $4,000,000 to $4,500,000 results in an additional $500,000 in economic gain. Since the capital gains tax rate is 15%, the tax on the reversion would increase by 15% of $500,000, which is $75,000.

Use the Following Information to Answer the Following Two Questions