You are considering purchasing a small office building for $2,375,000. The expected first-year potential gross income is $440,000 with a vacancy & collection loss equal to 15% of the PGI. Operating expenses and Capital expenditures are expected to be 40% and 5% of the EGI respectively. The mortgage on the property is 75% LTV at a 6% interest rate with a 25 year term with monthly compounding. The up-front financing cost of this mortgage is 2% of the loan amount.

Consider the same information, and that you expect to hold this property for 5 years. For simplicity consider that there is no growth in market, and that the expected selling price at the end of the holding period will be $2,600,000 with a selling expense of 4%. Consider that the original depreciable basis is 90% of the purchase price. The cost recovery of the building is 39 years. Ordinary tax rate is 30%, Capital gain tax is 15%, and depreciation recapture tax is 25%. You must show your work for full credit.

a) Estimate the Tax liability for year 1. (3 pts)

b) Estimate the Adjusted basis in year 5. (2 pts)

c) Estimate the Taxes due on sale in year 5. (3 pts)