5 Glen Campbell owns a small office building adjacent to an airport. He acquired the property 10 years ago at a total cost of $608,000—that is, $70,000 for the land and $538,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, and so Campbell is unsure whether he should keep it or sell it. His alternatives are as follows: a. Keep the property. Campbell's accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: Campbell makes a $13,450 mortgage payment each year on the property. The mortgage will be paid off in eight more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $80,700 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 15 years. He also feels sure that 15 years from now the land will be worth three times what he paid for it. Rental receipts Less: Building expenses: Utilities Depreciation of building Property taxes and insurance Repairs and maintenance Custodial help and supplies Net operating income $160,000 $27,750 18,292 22,250 9,200 44,000 121,492 $ 38,508 b. Sell the property. A realty company has offered to purchase the property by paying $224,000 immediately and $33,000 per year for the next 15 years. Control of the property would go to the realty company immediately. To sell the property, Campbell would need to pay the mortgage off, which could be done by making a lump-sum payment of $114,500. Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables. Required: Assume that Campbell requires a 12% rate of return. Compute net present value in favor of (or against) keeping the property using the total-cost approach. (Round discount factor(s) to 3 decimal places and other intermediate calculations to the nearest dollar amount.) Net present value Would you recommend that he keep or sell the property? Keep the property Sell the property

5 Glen Campbell owns a small office building adjacent to an airport. He acquired the property 10 years ago at a total cost of $608,000—that is, $70,000 for the land and $538,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, and so Campbell is unsure whether he should keep it or sell it. His alternatives are as follows: a. Keep the property. Campbell's accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: Campbell makes a $13,450 mortgage payment each year on the property. The mortgage will be paid off in eight more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $80,700 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 15 years. He also feels sure that 15 years from now the land will be worth three times what he paid for it. Rental receipts Less: Building expenses: Utilities Depreciation of building Property taxes and insurance Repairs and maintenance Custodial help and supplies Net operating income $160,000 $27,750 18,292 22,250 9,200 44,000 121,492 $ 38,508 b. Sell the property. A realty company has offered to purchase the property by paying $224,000 immediately and $33,000 per year for the next 15 years. Control of the property would go to the realty company immediately. To sell the property, Campbell would need to pay the mortgage off, which could be done by making a lump-sum payment of $114,500. Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables. Required: Assume that Campbell requires a 12% rate of return. Compute net present value in favor of (or against) keeping the property using the total-cost approach. (Round discount factor(s) to 3 decimal places and other intermediate calculations to the nearest dollar amount.) Net present value Would you recommend that he keep or sell the property? Keep the property Sell the property

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter11: Property Dispositions

Section: Chapter Questions

Problem 66P

See similar textbooks