The tax situation for houses with rentals is a bit more complicated than we presented in the chapter. On one hand, Sanjay and Sarah must pay taxes on any rental income, which will increase their expenses. On the other hand, Sanjay and Sarah can depreciate the percentage of the home rented and can deduct a percentage of expenses for repair and upkeep. For example, 35% of the Charlotte house is rented, thus the depreciation 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