Suppose that you acquire an office building on a standard commercial lot for $10,000,000. A market comparable analysis of lot values suggests that the value of similar lots is approximately $2,000,000. The depreciation rate is 2.5% per year (no partial month/year convention).

a. Suppose that you sell the building for $11,000,000 at the end of 5 years. On what amount will you pay gain on sale taxes? (2.5 pts.)

b. How will this amount be characterized for tax purposes? How much do you owe (Tax rates: depreciation re-capture 25% ; capital gains: 15%)? (2 pts.)

c. Can gain on sale tax be avoided? Explain. (1 pt.)