Eileen invested in residential real estate for $250,000 ($212,500 for the building and $37,500 for the land). She financed her purchase with a 20-year mortgage for $125,000 at an interest rate of 5%. A year has passed since her purchase. Eileen is now curious about how her taxes, cash flow, after-tax return, and after-tax yield would have been different if she had paid cash for the property. Eileen's files indicate the following information regarding her investment: Rental revenues were $37,500 The depreciation deduction was $7,727 Eileen paid $6,165 interest on the mortgage Eileen is in a 25% tax bracket Complete the following table. Assume that all factors except those described above remain constant. For the after-tax yields, round your answers to the nearest decimal and round all other answers to the nearest whole number. Enter all figures as positive numbers, and follow the guidance in the tables to perform the appropriate mathematical operations Used leverage $37,500 Paid cash Gross rental income Less: Annual depreciation deduction Subtotal Less: Interest expense for the year Taxable income Cash flow after paying interest Less: Income tax liability After-tax return After-tax yield $37,500 Because Eileen took out a mortgage to finance her investment, she was able to to making the investment solely with cash. In the first year of ownership, it appears to have been a her overall rate of return, compared strategy Eileen invested in residential real estate for $250,000 ($212,500 for the building and $37,500 for the land). She financed her purchase with a 20-year mortgage for $125,000 at an interest rate of 5%. A year has passed since her purchase. Eileen is now curious about how her taxes, cash flow, after-tax return, and after-tax yield would have been different if she had paid cash for the property. Eileen's files indicate the following information regarding her investment: Rental revenues were $37,500 The depreciation deduction was $7,727 Eileen paid $6,165 interest on the mortgage Eileen is in a 25% tax bracket Complete the following table. Assume that all factors except those described above remain constant. For the after-tax yields, round your answers to the nearest decimal and round all other answers to the nearest whole number. Enter all figures as positive numbers, and follow the guidance in the tables to perform the appropriate mathematical operations Used leverage $37,500 Paid cash Gross rental income Less: Annual depreciation deduction Subtotal Less: Interest expense for the year Taxable income Cash flow after paying interest Less: Income tax liability After-tax return After-tax yield $37,500 Because Eileen took out a mortgage to finance her investment, she was able to to making the investment solely with cash. In the first year of ownership, it appears to have been a her overall rate of return, compared strategy
