The tax situation for houses with rentals is a bit more complicated th we presented in the chapter. On one hand, Sanjay and Sarah must pa taxes on any rental income, which will increase their expenses. On th other hand, Sanjay and Sarah can depreciate the percentage of the ho rented and can deduct a percentage of expenses for repair and upkee For example, 35% of the Charlotte house is rented, thus the depreciati amount (a straight-line depreciation over 27 years) for Charlotte is 27PercentageRentedPrice=2735%600,000=$7,778. In addition, 35% of the repair and upkeep cost for Charlotte can be deducted from the rent income before computing the taxes. Incorporating these additional bilities and deductions into net annual cost gives: Net Annual Costs = Total Costs ( Rental Income + Tax Deduct. Rental Income =( Monthly Rent Months Occupied ). TaxDeduction==(TaxRate(1PercentageRented)InterestPaid)+Depreciation(TaxRate(1PercentageRented)P%Mortgage)+27PercentageRentedPrice Total Costs = Mortgage + Home Ouner's Insurance + Repair \& Upkeep + (House Price Property Tax Rate ) + Taxes on Rental Income = Mortgage + Home Ouner's Insurance + Repair \& Upkeep +( House Price Property Tax Rate )+ Tax Rate ( Monthly Rent Months Occupied ) - (Percentage Rented Repair \& Upkeep ) Using this more complete formula, we can compute the Net Annual Cost of each property. Note that Sanjay and Sarah need only pay the taxes on rental income when there is a renter, but they can deduct depreciation whether the apartment is rented or not. Thus, depreciation provides Sanjay and Sarah with a small buffer when the apartment is vacant. a) Using the variables and the upper and lower bounds given in Table 5.2 run a one-way sensitivity analysis on Sanjay and Sarah's three housing alternatives. Interpret the results. b) How do the sensitivity results differ from what we found in the chapter? c) Choose two variables to run a two-way sensitivity analysis. TABLE 5.2 Sanjay and Sarah's list of inputs, with base-case values and lower and upper bounds. 2 2 An astute reader will realize that not only are the bounds specific to a variable, but also to an alternative. All the variables listed with their bounds are for the Astoria St property except the Monthly Rent and Months Occupied. These latter two variables are for Barnard St. The tax situation for houses with rentals is a bit more complicated th we presented in the chapter. On one hand, Sanjay and Sarah must pa taxes on any rental income, which will increase their expenses. On th other hand, Sanjay and Sarah can depreciate the percentage of the ho rented and can deduct a percentage of expenses for repair and upkee For example, 35% of the Charlotte house is rented, thus the depreciati amount (a straight-line depreciation over 27 years) for Charlotte is 27PercentageRentedPrice=2735%600,000=$7,778. In addition, 35% of the repair and upkeep cost for Charlotte can be deducted from the rent income before computing the taxes. Incorporating these additional bilities and deductions into net annual cost gives: Net Annual Costs = Total Costs ( Rental Income + Tax Deduct. Rental Income =( Monthly Rent Months Occupied ). TaxDeduction==(TaxRate(1PercentageRented)InterestPaid)+Depreciation(TaxRate(1PercentageRented)P%Mortgage)+27PercentageRentedPrice Total Costs = Mortgage + Home Ouner's Insurance + Repair \& Upkeep + (House Price Property Tax Rate ) + Taxes on Rental Income = Mortgage + Home Ouner's Insurance + Repair \& Upkeep +( House Price Property Tax Rate )+ Tax Rate ( Monthly Rent Months Occupied ) - (Percentage Rented Repair \& Upkeep ) Using this more complete formula, we can compute the Net Annual Cost of each property. Note that Sanjay and Sarah need only pay the taxes on rental income when there is a renter, but they can deduct depreciation whether the apartment is rented or not. Thus, depreciation provides Sanjay and Sarah with a small buffer when the apartment is vacant. a) Using the variables and the upper and lower bounds given in Table 5.2 run a one-way sensitivity analysis on Sanjay and Sarah's three housing alternatives. Interpret the results. b) How do the sensitivity results differ from what we found in the chapter? c) Choose two variables to run a two-way sensitivity analysis. TABLE 5.2 Sanjay and Sarah's list of inputs, with base-case values and lower and upper bounds. 2 2 An astute reader will realize that not only are the bounds specific to a variable, but also to an alternative. All the variables listed with their bounds are for the Astoria St property except the Monthly Rent and Months Occupied. These latter two variables are for Barnard St
