Lonnie Carson purchased Royal Oaks Apartments two years ago. An opportunity has arisen for Carson to purchase a larger apartment project called Royal Palms, but Carson believes that he would have to sell Royal Oaks to have sufficient equity capital to purchase Royal Palms. Carsonpaid $2 million for Royal Oaks two years ago, with the land representing approximately $200,000 of that value. A recent appraisal indicated that the property is worth about $2.2 million today. When purchased two years ago, Carson financed the property with a 70 percent mortgage at 10 percent interest for 25 years (monthly payments). The property is being depreciated over 27.5 years (1/27.5 per year for simplicity). Effective gross income during the next year is expected to be $350,000, and operating expenses are projected to be 40 percent of effective gross income. Carson expects effective gross income to increase by 3 percent per year. The propertyvalue is expected to increase at the same 3 percent annual rate. Carson is currently in the 36 percent tax bracket and expects to remain in that bracket in the future. Because Carson has other real estate investments that are now generating taxable income, he does not expect any taxlosses from Royal Oaks to be subject to the passive activity loss limitations. If he sells Royal Oaks, selling expenses would be 6 percent of the sale price.a. How much after-tax cash flow (ATCFs) would Carson receive if Royal Oaks was sold today (exactly two years after he purchased it)?
Lonnie Carson purchased Royal Oaks Apartments two years ago. An opportunity has arisen for Carson to purchase a larger apartment project called Royal Palms, but Carson believes that he would have to sell Royal Oaks to have sufficient equity capital to purchase Royal Palms. Carson
paid $2 million for Royal Oaks two years ago, with the land representing approximately $200,000 of that value. A recent appraisal indicated that the property is worth about $2.2 million today. When purchased two years ago, Carson financed the property with a 70 percent mortgage at 10 percent interest for 25 years (monthly payments). The property is being
value is expected to increase at the same 3 percent annual rate. Carson is currently in the 36 percent tax bracket and expects to remain in that bracket in the future. Because Carson has other real estate investments that are now generating taxable income, he does not expect any tax
losses from Royal Oaks to be subject to the passive activity loss limitations. If he sells Royal Oaks, selling expenses would be 6 percent of the sale price.
a. How much after-tax cash flow (ATCFs) would Carson receive if Royal Oaks was sold today (exactly two years after he purchased it)?
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