1. Jena and Michelle decide to form a partnership to invest in Real estate. On June 30th, they Purchase 40-unit residential building with 10,000 square feet of retail space on the ground floor for $1,750,000. They obtained a first mortgage on the property in the amount $1,200,000 with a condition that Jena had to Guarantee the loan. Jena contributed cash of $200,000 and Michelle contributed $350,000.

a. Calculate the ending capital for each partner.

b. Describe each partners liability account and the impact of the ending capital.

2. Using the above facts, assume the residential units rent for $750 per month and the retail space leases for $15.00 per square foot annually. Based on the property appraisers web site you determine the land is 40% of the purchase price.

a. Calculate the depreciation for year 1 and year 2.

b. State the depreciation rate used and explain why.

3. After several years Jena and Michelle are offered $2,500,000 by a developer and they decide to sell the property. Selling costs incurred are $95,000. Depreciation for the holding period was $255,800.

a. Calculate the basis.

b. Calculate the capital gain or loss on the sale.

c. What is the depreciation recapture

d. What is the total tax on the sale if the tax rate is 25%?