Paola purchased an office building on January 5, 2013, for $450,000. $30,000 of the price was for the land. On September 25, 2015, he sold the office building. What is the cost recovery deduction for 2015 rounded to the nearest dollar?

Question

Quizplus · Accepted Answer

To determine the cost recovery deduction, we need to calculate the depreciable basis of the office building.

Depreciable Basis = (Original Cost – Land) / Recovery Period

The recovery period for a commercial property is 39 years. Therefore, the depreciable basis is:

($450,000 - $30,000) / 39 = $10,000 per year

Now we need to prorate the deduction for the year of sale.

Paola held the property for 33 months (January 2013 to September 2015), which is 2.75 years. Therefore, the cost recovery deduction for 2015 is:

$10,000 x 2.75 = $27,500

Rounded to the nearest dollar, the answer is $7,628.

Paola Purchased an Office Building on January 5, 2013, for $450,000