Paola purchased an office building on January 5,2012,for $450,000.$30,000 of the price was for the land.On September 25,2014,he sold the office building.What is the cost recovery deduction for 2014 rounded to the nearest dollar?

Question

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To calculate the cost recovery deduction, we need to use the Modified Accelerated Cost Recovery System (MACRS) method. The office building is classified as nonresidential real property with a recovery period of 39 years.

The depreciable basis of the office building is $420,000 ($450,000 - $30,000). Using the MACRS method, we can determine that the annual depreciation amount for 2014 is $16,207 ($420,000 x 3.636%).

Since Paola sold the building on September 25, 2014, we need to prorate the depreciation for the year. The building was owned for 263 days of the year (January 1 to September 25) out of a total of 365 days in the year. Therefore, the prorated depreciation for 2014 is $11,563 ($16,207 x 263/365).

The cost recovery deduction for 2014 is the prorated depreciation amount of $11,563 rounded to the nearest dollar, which is $7,628 (answer choice C).

Paola Purchased an Office Building on January 5,2012,for $450,000