Question

On April 3, 2020, Terry purchased and placed in service a building that cost $2,000,000. An appraisal determined that 25% of the total cost was attributed to the value of the land. The bottom floor of the building is leased to a retail business for $32,000. The other floors of the building are rental apartments with an annual rent of $160,000.

If required, round your answers to the nearest dollar.

Click here to access the depreciation table to use for this problem.

a. How is the property classified for MACRS?
Residential rental real estate

b. What is the life of the asset for MACRS?
27.5 years

c. Determine Terry's cost recovery deduction for 2020.
$

Answer 1

a. Cost of Building is $2000000

Cost attributed to land is 25% hence 75% is building

Income from rent is $160000 which is 83.33% of total income calculated as below -

$160000 / ($32000+$160000) * 100 =  83.33%

As rental income is more than 80%, under MACRS, it is classified as Residential property.

b. Depreciation charge for a residential property under MACRS is over 27.5 years.

Hence, life of the asset is 27.5 years

c.  Calculation of cost recovery deduction for 2020 is given below -

Sr.No.	Particulars	Amount
a	Value for purchased Building	$       2,000,000
b	Cost of land (25%)	$          500,000
c	Cost of Building (a-b)	$       1,500,000
d	Depreciation rate under MACRS for 27.5 years	3.6360%
e	Proportionate rate for 8.5 months	2.5755%
f	Cost recovery deduction for 2020 (c*e)	$            38,640

Therefore, cost recovery deduction for 2020 is $38,640