Tax depreciation shelters a portion of annual operating income from taxation. However, the amount of cumulative tax depreciation is taxed when the property is sold. Suppose that your taxes due on sale will be $35,000 greater than if the property had not been depreciated. If the sale were to occur 5 years from now, determine the present value of the tax on depreciation recapture in the year of sale assuming a discount rate of 9.5%.

Question

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The present value (PV) of the tax on depreciation recapture in the year of sale can be calculated using the formula for the present value of a single future payment: PV = FV / (1 + r)^n, where FV is the future value ($35,000), r is the discount rate (9.5% or 0.095), and n is the number of years (5). Plugging in the values: PV = $35,000 / (1 + 0.095)^5 = $22,233 (rounded to the nearest dollar).

Tax Depreciation Shelters a Portion of Annual Operating Income from Taxation