Assume the following facts about a Nevada rental property purchased by a US individual. Assume the asset was acquired on day 1 of year 1. For purposes of computing tax depreciation expense, the building uses a 40 year, straight-line depreciation method, with no special first-year convention (i.e. basis divided by 40 each year, including year 1 and year 5) and the personal property uses a 5 year, straight-line depreciation method, with no special first-year convention (i.e. basis divided by 5 each year, including year 1 and year 5).

The apartment complex has the following projected attributes: Rental income Year1 $26,000 Year2 $32,000 Year3 $32,600 Year4 $33,500 Year5 $35,000 Property expenses Year1 $10,000 Year2 $10,100 Year3 $10,500 Year4 $11,000 Year5 $11,200 Interest expense Year1 $8,723 Year2 $8,550 Year3 $8,368 Year4 $8,175 Year5 $7,971 Loan principal repayment Year1 $3,067 Year2 $3,240 Year3 $3,423 Year4$3,616 Year5$3,820 LandBasis $40,000 Building Basis $150,000 Personal Property Basis $10,000 Debt $160,000 Equity $40,00030

a) Calculate the taxable income and tax (assume 29.6% for net rental taxable income) for each year after computing depreciation, assuming no sale of the asset.

b) Calculate the before-tax cash flow and after-tax cash flow each year assuming no sale and using the tax determined above

c) Assume instead that the debt is refinanced on the first day of Year 3. The new amount borrowed is $230,000 and the new debt proceeds were used to pay off the old loan and the remaining cash was used to pay equity holders. The new loan payments after refinancing are below.

Calculate both (1) the before-tax cash flow and (2) the after-tax cash flow each year. Interest expense Year1 $12,540 Year2 $12,291 Year3 $12,029 Loan principal repayment Year1 $4,409 Year2 $4,658 Year3 $4,920

d) Assume no refinancing (ignore c) and that the asset was sold on the last day of year 5 for $320,000. Calculate the taxable income and tax liability from the sale. To the extent that gain is attributable to depreciation taken on the building (total building depreciation), assume that is taxed at 25% and all other gains are taxed at 20%. Assume no depreciation recapture on the personal property depreciation.