Eric has a house and lot for sale for $210,000. It is estimated that $40,000 is the value of the land and $170,000 is the value of the house. On January 1 Bonnie is purchasing the house to rent and plans to own it for 5 years. After 5 years, it is expected that the house and land can be sold on December 31 for $225,000. Total annual expenses (maintenance, property taxes, insurance, etc.) are expected to be $5000 per year. The house would be depreciated by MACRS depreciation using a 27.5-year straightline rate with midmonth convention for rental property. For depreciation, a salvage value of zero was used. Bonnie wants a 15% after-tax rate of return on her investment. You may assume that Bonnie has an incremental income tax rate of 28% in each of the 5 years. Capital gains are taxed at 15%. Determine the following:
(a) The annual depreciation
(b) The capital gain (loss) resulting from the sale of the house
(c) The annual rent Bonnie must charge to produce an after-tax rate of return of 15%.