Question

Carmen purchased a residential-rental property over in Yakima, where prices are much lower than in Seattle. She paid $125,000 for the house, in 2018. The appraisal indicated the land was worth $25,000, and the building was worth $100,000. How much “depreciation” expense can Carmen claim on her 2019 income tax return for this property? Choose the closest number, because the amounts below may not be exact.
a. $        0

b. $ 2,500

c. $ 3,600

d. $ 4,500

e. $ 7,200

Answer 1

Ans.=

Given,

Residential rental property purchased in 2018

Basis of the property = $125,000

Land Component = $25,000

Building Component = $1,00,000

Now,

As per the IRS rules, Land cannot be depreciated as it has unlimited life and cannot be practically used up. Hence, only the value of building can be depreciated. The IRS tax laws further states that such residential rental properties should be depreciated using MACRS method where useful life of a such rental property is assumed to be 27.5 years and is depreciated at a rate of 3.636% every year.

Step -1: Calculating Basis of property= It is the total purchase price of asset = $125,000

Step -2: Calculating cost of Land & Building = Building Cost = $1,00,000 which is 80% of the appraisal value(100,000 / 125,000). Hence, 80% of the basis can be allocated to Building component for the purpose of depreciation and the rest 20% will be allocated to Land.

Step -3: Determine Depreciable Basis = It is the portion of building portion that is eligible for depreciation, i.e, 80% of $125,000 = $100,000

Step-4: Depreciation to be claimed = Depreciable Basis * Depreciation rate

= $100,000 * 3.636%

= $3,636

Hence,

Option (C),i.e, $3600 is the correct answer as this option is the closest to the depreciation to be claimed.

=> I would be glad to receive a feedback or suggestion to the question answered above.

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