Question

On January 1, 2019, Daniel Durrow owned a commercial rental property which had an adjusted basis to him of $270,000. Daniel made the following expenditures during 2019:

• Ordinary painting of building                    $ 5,000
• Repair of roof section (useful life not

appreciably extended)                                  2,500

• Legal fees paid to defend title                   10,000
• Property taxes                                             6,000
• Assessment for local street improvement

(value of property increased greatly)          15,000

What is Daniel’s basis in the rental property at the beginning of 2020 and how much depreciation would be deductible in 2020?

Answer 1

The adjusted basis is calculated by taking the original cost, adding the cost for improvements and related expenses and subtracting any deductions taken for depreciation and depletion to calculate depreciation. You take the value of the item and divide its value by the number of years in its reasonable lifespan. Then you have the amount you can write off on your taxes as an expense each year.

CALCULATION OF AMOUNT:

adjusted basis $ 270,000

Legal fees paid $ 10,000

Property taxes $ 6,000

Assessment for

street improvement   $ 15,000

total amount    $301,000

NOTES TO ACCOUNT:

• Ordinary painting of building and Repair of roof section does notb lead to increase in useful life of property hence not formed part of capitalisation and hence no deduction for depreciation it is an expense.

• According to the IRS, you can depreciate a rental property if it meets all of these requirements:

• You own the property (you are considered to be the owner even if the property is subject to a debt).
• You use the property in your business or as an income-producing activity.
• The property has a determinable useful life, meaning it's something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
• The property is expected to last more than one year.

• Even if the property meets all of the above requirements, it can’t be depreciated if you placed it in service and disposed of it (or no longer use it for business use) in the same year. Land isn't considered depreciable since it never gets "used up."2 And in general, you can't depreciate the costs of clearing, planting, and landscaping, as those activities are considered part of the cost of the land.

• assuming conditions fulfilled

CALC ULATION OF DEP:

Once you know which MACRS system applies, you can determine the recovery period for the property. The recovery period using GDS is 27.5 years for residential rental property.2 If you're using ADS, the recovery period for the same type of property is 30 years for property placed in service after Dec. 31, 2017, or 40 years if placed in service prior to that.

Next, determine the amount that you can depreciate each year. As most residential rental property uses GDS, we’ll focus on that calculation.

For every full year a property is in service, you depreciate an equal amount: 3.636% each year as long as you continue to depreciate the property.

hence depreciation = $301,000*3.636%

= $10944.3594