Question

You are still an employee of University Consultants, Limited. The investor tells you she would also like to know how tax considerations affect your investment analysis. You determine that the building represents 85 percent of value and would be depreciated over 39 years (use 1/39 per year except year 1 depreciation is also multiplied by 11.5 / 12 to adjust for the mid month convention). The potential investor indicates that she is in the 37 percent tax bracket and has enough passive income from other activities so that any passive losses from this activity would not be subject to any passive activity loss limitations. Capital gains from price appreciation will be taxed at 20 percent and depreciation recapture will be taxed at 25 percent. Because the investor works over 750 hours per year in real estate related activities, she is able to avoid the NIIT 3.8 percent surcharge.

What is the investor’s expected after-tax internal rate of return on equity invested (ATIRR)?

Answer 1

The ATIRR for the investor takes into account the initial investment, cash flows, applicable taxes, and tax savings due to depreciation. It also includes capital gains tax, depreciation recapture and adjusts for the investor's specific tax circumstances, including their involvement in real estate activities.

Step-by-step explanation:

The question seeks to determine the investor's expected after-tax internal rate of return on equity invested (ATIRR) after factoring in various tax considerations such as depreciation, tax brackets, and the treatment of capital gains and depreciation recapture. The given information allows us to account for the investor's specific financial situation, including their tax rate, passive income, and professional involvement in real estate, thereby avoiding the additional Net Investment Income Tax (NIIT). To calculate the ATIRR, we would need to consider the cash flows from the investment, the applicable tax savings from depreciation, the tax implications of any potential sale or depreciation recapture, and then discount these figures to present value using the investor's specific tax rates before finally computing the internal rate of return on these after-tax cash flows.