Real Estate Finance Exam 4 Ch 6 10 and 16 40 Questions Half Math Half Conceptual Conceptuals from 16 6 and 10 Calculations from Ch 16 Installment Sales and Ch 6 Refinancing Installment Sales o There are 5 Tables A B C D E you are filling out each table from the sellers o These tables will be provided on the exam but you will not be required to fill o Installment Sales are used to lower the taxes paid when compared to an outright o To qualify as an installment sale the seller must receive at least one payment perspective them out sale of property after the year of sale Installment Sale Problem from Class 1 Find the outstanding balance of the Mortgage on the property N 15 I 8 PMT 11 683 PV 100 000 2 A Find the ATCF in the year of the sale Down Payment Selling Expenses Taxes ATCF Clearly our first problem is that we need to find a number for taxes B Taxes in Year of Sale Down Payment Excess of assumed mortgage over AB SE Total Payment in Yr of Sale Problem 2 what the hell is excess of assumed mortgage over Adjusted Basis and Selling Expenses This number let s call it Excess is simply the difference between the assumed mortgage balance what s left over on your mortgage and the amount of adjusted basis and selling expenses you will incur Or Assumed Mortgage Balance Outstanding Balance Adjusted Basis Selling Expenses Excess In our example the outstanding balance was found to be 100 000 and the selling expenses are said to be 10 000 In case you forgot how to find the Adjusted Basis the formula is Total Cost Purchase Price any Acquisition Costs Accumulated Depreciation Adjusted Basis So in our problem the purchase price is said to be 330 000 and the Accumulated Depreciation said to be 100 000 so our AB comes out to 230 000 Now simply subtract this 230 000 10 000 Selling Expenses from the 100 000 we got for our outstanding balance above and you will get a negative 140 000 The negative is important because the rule for Excess is that if it is a negative number OR zero you enter 0 as your excess number Excess can only be 0 or positive negative excess is the same as 0 This should explain why excess is always 0 in the equation online Now if you keep scrolling through the tables we are up to Total Payment in Yr of Sale and directly underneath this is another number that we must find This being Profit Percentage The Profit Percentage Total Gain Contract Price Which doesn t help us much unless we know how to find the total gain and contract price Contract Price Selling Price Balance of Assumed Mortgage Excess Contract Price and our Total Gain is found by Selling Price Selling Expense Adjusted Basis use equation above Total Gain Once you have these two numbers simply divide TG Contract Price to get your Profit Percentage which you will use to multiply by your Total Payment in Yr of Sale to find the Taxable Portion of Gain 100 000 x 5333 53 330 Once you have this number you have to split it into Depreciation Recovery Tax and Capital Gain Tax To find the amount attributed to Depreciation Recovery multiply the depreciation recovery percentage which was stated to be 62 5 by the 53 330 we got for Taxable Portion of Gain and you will see that we get 33 331 for the amount attributed to Depreciation Recovery The remaining 19 999 is the amount of capital gains Multiply these two numbers by their given tax percentage and add the two to get your total taxes All of this is portrayed in parts B and C of the Installment Problem from Class that is posted online 3 Find the Debt Service of the New Mortgage N 5 PV 200 000 I 8 5 PMT 50 753 The 200 000 comes from subtracting the Down Payment 100 000 and the Assumed Mortgage Balance 100 000 from the Sale Price 400 000 The balloon payment is just the outstanding balance when you pay off the mortgage So for this example we are paying it off at the EOY2 and if you calculate this the Outstanding Balance is 129 625 which takes the place of our balloon payment in year 2 The next problem we have is finding the taxes on our installment payments D ATCF from Installments Debt Service PMT Balloon Payment Tax on Installments ATCF E Taxes on Installments Repayment of Principle Balloon Payment Principle Portion x Profit Percentage Taxable Principle To find the amount of principle each year you will have to use the annuity function on your calculator and since the payments are in years type it in as Prn 1 1 for the principle in yr 1 and Prn 2 2 for the principle in year 2 The balloon payment remains the same but remember to add it to your principle pmt in year 2 Your profit percentage is also the same as when we calculated it for the ATCF from the sale 53333 Once you find your taxable principles of 18 000 for year 1 and 88 660 for year 2 you need to find how much is attributed to Depreciation Recovery in each year The same 62 5 as before is how much you attribute to Depreciation Recovery So for year 1 18 000 625 11 250 in Depreciation Recovery The difference between this number and the original amount of Taxable Principle is the amount of Capital Gains for each year So for Year 1 18 000 11 250 6 750 in Capital Gains Take your percentages from each to get the amount of Depreciation Recovery Taxes and Capital Gains Taxes for years 1 and 2 Next you have to find how much tax you must pay on your interest earned The amount of interest earned each year is the difference between the Debt Service Payment and the Repayment of Principle amount we found earlier So for year one 50 753 33 753 17 000 in interest Multiply this by your marginal tax rate 28 to get the amount of taxes paid on interest for each year Now add up your Depreciation Recovery Taxes Capital Gains Taxes and Interest Taxes for each year and bring them back up top to finish off finding your ATCF for the Installments Mortgage Refinancing Replaces an existing mortgage with a new mortgage usually at a lower interest rate There is no property transaction People most often refinance when the market rates are low The refinancing decision compares the PV of the benefits payment savings with new rate to the PV of the costs of getting the new mortgage prepayment penalty of old one and financing costs of new one also takes into account costs of origination fees a new appraisal new surveyor Some assumptions must also be made when calculating a Refinancing 1 Amount of the new loan Just enough to pay off existing loan a b Enough to payoff the existing loan and the …