Derek and Meagan Jacoby recently graduated from State Universityand Derek accepted a job in business consulting while Meaganaccepted a job in computer programming. Meagan inherited $75,000from her grandfather who recently passed away. The couple isdebating whether they should buy or rent a home. They located arental home that meets their needs. The monthly rent is $2,250.They also found a three-bedroom home that would cost $475,000 topurchase. The Jacobys could use Meaganâs inheritance for a downpayment on the home. Thus, they would need to borrow $400,000 toacquire the home. They have the option of paying two discountpoints to receive a fixed interest rate of 4.5 percent on the loanor paying no points and receiving a fixed interest rate of 5.75percent for a 30-year fixed loan.
Though anything could happen, the couple expects to live in thehome for no more than five years before relocating to a differentregion of the country. Derek and Meagan donât have anyschool-related debt, so they will save the $75,000 if they donâtpurchase a home. Also, consider the following information:
⢠The coupleâs marginal tax rateis 25 percent. ⢠Regardless of whether they buyor rent, the couple will itemize their deductions. ⢠If they buy, the Jacobys wouldpurchase and move into the home on January 1, 2014. ⢠If they buy the home, the property taxes for the year are$3,600.
⢠Disregard loan-related fees notmentioned above. ⢠If the couple does not buy a home, they will put their moneyinto their savings account where they earn 5 percent annualinterest.
⢠Assume that all unstated costsare equal between the buy and rent option.
Required: Help the Jacobys with theirdecisions by answering the following questions:
a. If the Jacobys decide to rent the home, what is their after-taxcost of the rental for the first year (include income from thesavings account in your analysis)? (Round your intermediateand final answer to the nearest whole dollar amount.)
After-tax cost?____
b. What is the approximate break-even point in years for paying thepoints to receive a reduced interest rate (to simplify thiscomputation, assume the Jacobys will make interest-only payments,and ignore the time value of money)? (Round your answer to1 decimal place.)
Break even point in years?________
c. What is the after-tax cost (in interest and property taxes) ofliving in the home for 2014? Assume that the Jacobys' interest rateis 5.75 percent, they do not pay discount points, they makeinterest-only payments for the first year, and the value of thehome does not change during the year.
After tax cost?________
d. Assume that on March 1, 2014, the Jacobys sold their home for$525,000, so that Derek and Meagan could accept job opportunitiesin a different state. The Jacobys used the sale proceeds to (1) payoff the $400,000 principal of the mortgage, (2) pay a $10,000commission to their real estate broker, and (3) make a down paymenton a new home in the different state. However, the new home costonly $300,000. (Round your intermediate and final answersto the nearest whole dollar amount.)
d-1. What gain or loss do the Jacobys realize and recognize on thesale of their home (assume they make interest only payments on theloan)?
Realized gain (loss)?______
Recognized gain (loss)?________
d-2. What amount of taxes must they pay on the gain, if any?
Taxes payable on gain?________
e. Assume the same facts as in part (d), except that the Jacobyssell their home for $450,000 and they pay a $7,500 commission. Whateffect does the sale have on their 2014 income tax liability?Recall that the Jacobys are subject to an ordinary marginal taxrate of 25 percent and assume that they do not have any othertransactions involving capital assets in 2014.
Effect of loss on Jacoby's tax liability?______
Derek and Meagan Jacoby recently graduated from State Universityand Derek accepted a job in business consulting while Meaganaccepted a job in computer programming. Meagan inherited $75,000from her grandfather who recently passed away. The couple isdebating whether they should buy or rent a home. They located arental home that meets their needs. The monthly rent is $2,250.They also found a three-bedroom home that would cost $475,000 topurchase. The Jacobys could use Meaganâs inheritance for a downpayment on the home. Thus, they would need to borrow $400,000 toacquire the home. They have the option of paying two discountpoints to receive a fixed interest rate of 4.5 percent on the loanor paying no points and receiving a fixed interest rate of 5.75percent for a 30-year fixed loan. |
Though anything could happen, the couple expects to live in thehome for no more than five years before relocating to a differentregion of the country. Derek and Meagan donât have anyschool-related debt, so they will save the $75,000 if they donâtpurchase a home. Also, consider the following information: |
| ⢠| The coupleâs marginal tax rateis 25 percent. |
| ⢠| Regardless of whether they buyor rent, the couple will itemize their deductions. |
| ⢠| If they buy, the Jacobys wouldpurchase and move into the home on January 1, 2014. |
| ⢠| If they buy the home, the property taxes for the year are$3,600. |
| ⢠| Disregard loan-related fees notmentioned above. |
| ⢠| If the couple does not buy a home, they will put their moneyinto their savings account where they earn 5 percent annualinterest. |
| ⢠| Assume that all unstated costsare equal between the buy and rent option. |
| Required: |
| Help the Jacobys with theirdecisions by answering the following questions: |
| a. | If the Jacobys decide to rent the home, what is their after-taxcost of the rental for the first year (include income from thesavings account in your analysis)? (Round your intermediateand final answer to the nearest whole dollar amount.) |
After-tax cost?____
| b. | What is the approximate break-even point in years for paying thepoints to receive a reduced interest rate (to simplify thiscomputation, assume the Jacobys will make interest-only payments,and ignore the time value of money)? (Round your answer to1 decimal place.) |
Break even point in years?________
| c. | What is the after-tax cost (in interest and property taxes) ofliving in the home for 2014? Assume that the Jacobys' interest rateis 5.75 percent, they do not pay discount points, they makeinterest-only payments for the first year, and the value of thehome does not change during the year. |
After tax cost?________
| d. | Assume that on March 1, 2014, the Jacobys sold their home for$525,000, so that Derek and Meagan could accept job opportunitiesin a different state. The Jacobys used the sale proceeds to (1) payoff the $400,000 principal of the mortgage, (2) pay a $10,000commission to their real estate broker, and (3) make a down paymenton a new home in the different state. However, the new home costonly $300,000. (Round your intermediate and final answersto the nearest whole dollar amount.) |
| d-1. | What gain or loss do the Jacobys realize and recognize on thesale of their home (assume they make interest only payments on theloan)? |
Realized gain (loss)?______
Recognized gain (loss)?________
| d-2. | What amount of taxes must they pay on the gain, if any? |
Taxes payable on gain?________
| e. | Assume the same facts as in part (d), except that the Jacobyssell their home for $450,000 and they pay a $7,500 commission. Whateffect does the sale have on their 2014 income tax liability?Recall that the Jacobys are subject to an ordinary marginal taxrate of 25 percent and assume that they do not have any othertransactions involving capital assets in 2014. |
Effect of loss on Jacoby's tax liability?______
