05_Tax, Interest and Depreciation

Question 1

PBTCF of Operating CFs

Answer 1

PGI [Potential Gross Income]
(-)v [Vacancy allowance]
(+) OI [Operating Income e.g. parking]
(-) OE [Operating Expenses]
(=) NOI [Net Operating Income]
(-) CI [Capital Improvement Expenditures]

= PBTCF

Question 2

PBTCF
Reversion Cash Flow
Formula

Answer 2

V [Proeprty Value at time of sale]
(-) SE [Selling Expenses e.g. broker]
= PBTCF

Question 3

PATCF

Answer 3

= PBTCF
(-) Income Tax
= PATCF

Income Tax = NOI x income Tax rate

Question 4

Types of Accounting

Answer 4

1. Accrual Accounting (for tax purposes)
2. Cash Flow Accounting (actual cash flow)

Question 5

Accrual Accounting

Answer 5

• designed to register income and expenses when they are accrued ie when they are legally owed

Question 6

Cash Acounting

Answer 6

• cash basis accounting designed to register Cash Inflows and Outflows when they actually occur for property owner

Question 7

Difference between Accrual income statement and cash flow statement

Answer 7

• Depreciation and Capital Expenditures
• Interest payment and debt amortization

Question 8

Depreciation Expense

Answer 8

• not for cash accounting, but accrual accounting
• not a cash outflow
• Depreciation is deductible for income tax purposes

Question 9

Original Cost

in context of depreciation

Answer 9

• orgiinal cost basis includes all costs associated with acquiring property and transferring title

Question 10

Depreciation Basis

Answer 10

= cost - land

LAND value cannot be depreciated

Question 11

Depreciation of property in context of German income tax law

Answer 11

• 3% for acquisition and construction costs after 31.12.200
• before then 4%

Question 12

Capital Expenditure

Answer 12

• deducted from cash flow bottom line
• on accrual basis such expenditures would not be fully charged as expenses in the year they are made
• capex do not (much) reduce income tax obligation of the property owner in year they are made

Question 13

Debt Amortization

Answer 13

• if owner has financed property by taking out mortgage or debt CF to owner is reduced by debt service payment to lender
• incl. interest + debt amortization
• from accrual perspective **only interest portion is charged as expense against owner’s taxable income **
• debt amortization is reduction of owners liability (which is not expense)

Question 14

Corporate Income Tax

Answer 14

- all income
- e.g. corporate profits, investmetn income and capital gains

• in Germany 15% corporate tax based rate + 5.5% solidarity surchage + 12.5-20.3% municipality levy trade trax

Trade Tax = base rate (3.5%) * Municipal tax rate (Hebesatz)

Question 15

Real Estate Tax / Property tax

Grundsteuer

Answer 15

• assessed value * base federate rate * municipal multiplier
• effective rate is usaully between 1.5% and 2.3%
• real estate tax is part of operating expenses

Question 16

Property Tax

Grundsteuer

Answer 16

• tax deductible for income tax purposes if the property is used in a trade or business
• effective tax rate is usually between 1.5% and 2.3%
• assessed property value

Tax Amount = Base rate * a municipal factor

Question 17

Property Tax part of

Grundsteuer

Answer 17

OE (Other Expenses)

Question 18

Taxes for Property Acquisition

Answer 18

• 6% real estate transfer tax (Grunderwerbsteuer)
• 0.5% public notary
• 1% registration fees to cadaster (Grundbucheintrag)
• 7.14% real estae broker fees in general

Question 19

Tax
Selling property

Answer 19

• capital gain tax