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. A 40-unit apartment building is placed into service on August 15, 2013 at a cost...

. A 40-unit apartment building is placed into service on August 15, 2013 at a cost of $1,000,000. The

apartments will rent for $850-$1200 per month. The owners sell the apartment building on June 1, 2017 for

$850,000.

a) Find the depreciation deduction and unrecovered investment (Book Value) for each tax year involved.

b) What is the difference between the Book Value and the sales price in 2017?

c) What taxes will the owners owe, (or what tax credit will they receive) due to the sale in 2017?

(Assume tax rate = 40%)

d) If the apartments were sold for $950,000, ) What taxes will the owners owe, (or what tax credit will they

receive) due to the sale in 2017

Solutions

Expert Solution

a) Any residential rental property placed in service after 1986 is depreciated using the Modified Accelerated Cost Recovery System (MACRS), an accounting technique that spreads costs (and depreciation deductions) over 27.5 years, the amount of time the IRS considers to be the “useful life” of a rental property.

Depreciation Percentage is according to the IRS Residential Rental Property GDS table.

Book Value = Cost - Accumulated Depreciation

Year Depreciation Percentage Depreciation Accumulated Depreciation Book Value
August 2013 1.364% 13640 13640 986360
2014 3.636% 36360 50000 950000
2015 3.636% 36360 86360 913640
2016 3.636% 36360 122720 877280
May 2017 1.666% 16660 139380 860620

b) Difference between Book value and Sales price = Book Value - Sales Price = 860,620 - 850,000 = $10,620

c) There is no capital gain or loss. There is an ordinary income loss of $10,620, which will reduce the federal income taxes by = 0.4*10620 = $4,248

Tax Credit = $4,248

d) Here, Income = Selling Price - Book value = $89,380

He will not get any tax credit. But he will pay tax = 89380*0.4 = $ 35,752

jeff jeffy answered 2 years ago
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