On May 5, 2018, Sarah purchased a new office building for $2.5 million to use for...

On May 5, 2018, Sarah purchased a new office building for $2.5 million to use for rental purposes. After review of the appraisal, $100,000 is allocated to the value of the land. On November 3, 2018, she began to lease office space in the building. On March 4, 2023, Sarah sold the building. What is Sarah's depreciation deduction for 2018 and 2023?

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Expert Solution

As per the standards of accounting and various laws related to income tax, one can not claim the full capital expenditure at one go against the income of a particular year, instead you can only claim a certain percentage of that expenditure year on year against the income to arrive at net profit.

It should also be noted that depreciation deduction would not be available on the amount allocated to land. Also the depreciation would be available only when asset is put to use. Like in the given case Sarah has purchased the property on May 5 2018 for rental purpose but she began to lease the office only from 3rd November. So depreciation for 2018 would be available only from 3rd November.

In the given case study, Sarah can claim depreciation deduction for year 2018 and 2023 limited to only propotionate amount instead of depreciation deduction for full year.

Assuming the rate of depreciation to be 10%-

Dep for 2018= 2400000*10%*240/365= 157808

Dep for 2023= 1471102*10%*63/365= 25392

See details below-

Cost of asset				2400000

Dep-2018				157808.2

WDV				2242192

Dep 2019				224219.2

WDV				2017973

Dep 2020				201797.3

WDV				1816175

Dep 2021				181617.5

WDV				1634558

Dep 2022				163455.8

WDV				1471102

Dep 2023				25391.62

WDV				1445710

ekkarill92 answered 3 hours ago

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