Sale of an Asset and the Tax Consequences

SP = Selling Price (or Market Value)

BV = Book Value (or Adjusted Basis)
1.

If an asset is sold at book value then there is no gain or loss

on the sale, hence no tax effect. The cash flow in the
problem will be the entire amount from the sale.

2.

If an asset is sold for more than book value, there is a gain

on the sale and taxes must be paid on the gain. This will
reduce the cash flow from the sale value by the amount of
taxes paid.

3.

If an asset is sold at a loss, there is a tax write-off, which

can be applied to gains in other investments. Cash flow
from the sale will be increased by the amount of the tax
write-off.
(SP BV)

Gain on Sale

t(SP BV)

Taxes due or tax write-off

SP t(SP BV)

After-tax cash flow

(aka, after-tax salvage value)

Example:
SP = $60,000

Gain on Sale
BV = $28,800

tax rate = .34

Gain on Sale: (SP BV) = (60,000 28,800) = 31,200

Taxes due:

t(SP BV) = .34(31,200) = 10,608

After-tax gain: SP t(SP BV) = 60,000 10,608 = 49,392

$49,392 is the after-tax salvage value or after-tax cash flow

Example:
SP = $28,800

Loss on Sale
BV =$60,000

tax rate = .34

Gain on Sale: (SP BV) = (28,800 60,000) = -31,200

Taxes due:

t(SP BV) = .34(-31,200) = -10,608

After-tax gain: SP t(SP BV) = $28,800 (-10,608) = 39,408

$39,408 is the after-tax salvage value or after-tax cash flow