Question A5.2 Steve has a house and lot for sale for $70, 000. It is estimated t

ID: 2436020 • Letter: Q

Question

Question A5.2 Steve has a house and lot for sale for $70, 000. It is estimated that $10,000 is the value of the land and $60 000 is the value of the house. Annthea is purchasing the house on January 1 to rent and plans to own the house for 5 years. After 5 years, it is expected that the house and land can be sold on December 31 for $80,000 (S20,000 for the land and S60,000 for the house). Total annual expenses (maintenance, property taxes, insurance, etc.) are expected to be S3000 a year. The house would be depreciated using a CCA rate of 10%. Annthea wants a 15% after-tax rate of return on her investment. You may assume that Annthea has an incremental income tax rate of 27% in each of the 5 years. Capital gains are taxed at 13.5%. Determine the following: (a) The annual depreciation. (b) The capital gain (loss) resulting from the sale of the house. (c) The annual rent Annthea must charge to produce an after-tax rate of return of 15%.

Explanation / Answer

(a) Annual depreciation

Particulars

Year

Value of House

60,000

54,000

48,600

43,740

39,366

Annual Dep on house @10% CCA

6,000

5,400

4,860

4,374

3,937