Doug purchased a new factory building on January 15, 1991, for $400,000.On March 1, 2019, the building was sold. Determine the cost recovery deduction for the year of the sale; Doug did not use the MACRS straight-line method.
A)$0
B)$1,587
C)$2,645
D)$12,696

Question

Quizplus · Accepted Answer

Since Doug did not use the MACRS straight-line method, we need to know the depreciation method he used and the estimated useful life of the building. Without this information, we cannot calculate the cost recovery deduction accurately. However, we can use the mid-month convention under MACRS for the year of the sale.

The mid-month convention assumes that all property placed in service during a particular month is used for exactly half that month. In this case, March is the month of sale, so we assume that the building was used for half of March.

Under MACRS, the recovery period for nonresidential real property is 39 years. Using the mid-month convention, the depreciation percentage for the year of the sale is 1.364% (100% divided by 39 years, multiplied by 1/2 to account for the mid-month convention).

The depreciation deduction for the year of the sale is $5,456 ($400,000 divided by 39 years, multiplied by 1.364%). Since the building was sold, there is no unrecaptured section 1250 gain, and the depreciation deduction is simply the cost recovery deduction.

Therefore, the cost recovery deduction for the year of the sale is $2,645 (rounded to the nearest dollar).

The answer is C ($2,645).

Doug Purchased a New Factory Building on January 15, 1991