Problem
Now, assume you have decided to invest in a residential investment property. You will purchase the property for $485,000 on January 2, 2021. After making $28,600 in improvements, the property is placed into service on April 12, 2021. You know that real estate depreciation is an important tax tool for rental property owners, so you want to estimate depreciation in each year you own the property. Make sure to include your work for questions (A) - (F).
A. What is the basis for the rental property?
B. Calculate depreciation for year 2021, the first year the residential property is in service.
C. Calculate depreciation for years 2022 - 2028. What do you notice?
D. Assume you decide to sell the residential property for $625,000 on March 25, 2029. Calculate depreciation in year 2029. How did you adjust the depreciation factor?
E. Calculate the capital gain from the sale of the residential property in 2029.
F. Overall, what is your net cash flow after taxes from the sale of the property in 2029? Assume a capital gains tax rate of 15%.