Steven is looking to purchase an investment property, and is interested in a partic- ular apartment on London Street. This apartment costs $500,000. Steven has also estimated that the other upfront costs for purchasing the apartment will total $5, 000. Steven has also spoken to his real estate agent Ray and his banker Jane, and gathered the following additional information:

• Strata for the apartment is estimated at $700 per quarter in arrears.

• Council rates are estimated at $500 per year payable in arrears.

• Steven can expect to receive $1,600 per month in rent, paid in advance. The apartment is currently tenanted, so he expects to receive the first rent payment immediately after he purchases the apartment.

• The bank will only lend a maximum of 80% of the apartments price.

• The bank is willing to lend to Steven at an interest rate of 3.5% p.a. compounding daily. The banking industry standard is to always assume there are 365 days in a year.

  Currently, Steven is considering the value of this investment over the next 10 years

Question:

1. Steven has spoken to his accountant Basil, who has noted the following information relating to tax:

• The initial deposit would NOT count as a tax deduction

• The upfront and ongoing costs (strata and council rates), as well as interest expenses DO count as tax deductions

• Rent counts towards taxable income

• Taxable income is calculated by taking taxable amounts and subtracting valid deductions.

  Assuming that the first year Steven owns the apartment coincides perfectly with a financial year, calculate the taxable income arising from owning the apartment in the first year.

  Note that it is possible for this number to be negative (this would offset against his other income). (2 marks)

• BONUS QUESTION In the second year, would Steven expect his taxable income to be higher or lower than your answer in question 1)? Justify your answer. space (1 mark

• NOTE- please show working out using time value of money formulas on paper not excel