Question

you have just purchased a small apartment complex that has a $1,000.000 depreciale basis. assume no personal property. you are in the 28 percent ordinary tax bracket and 25 percent depreciation recapture bracket. capital gains will be taxed at 15 percent. you discount future tax benefits from depreciations at 7 percent. if you never sold the property, what would be the present value of the annual tax savings from depreciation?

Answer 1

The present value of the annual tax savings from depreciation would be $4,000,000.

Step-by-step explanation:

To calculate the present value of the annual tax savings from depreciation, we need to discount the future tax benefits at the given rate of 7%. The annual tax savings from depreciation is calculated as the depreciation basis multiplied by the tax bracket.

In this case, the annual tax savings would be $1,000,000 * 0.28 = $280,000.

To find the present value, we can use the formula:

PV = CF / (1 + r)^n

Where PV is the present value, CF is the cash flow ($280,000), r is the discount rate (7%), and n is the number of years (assume indefinite since the property is never sold).

Substituting the values into the formula, we get:

PV = $280,000 / (1 + 0.07)^∞

This equation represents a perpetuity, and the present value can be calculated as:

PV = $280,000 / 0.07

= $4,000,000

Therefore, the present value of the annual tax savings from depreciation would be $4,000,000.