Atiqa took out of service and sold a residential rental property on October 31 of this year.She had originally acquired the property ten years ago.The building (excluding the value of the land)cost $1,000,000.How much is her current year depreciation deduction?
A)$30,300
B)$36,360
C)$18,182
D)$28,785

Question

Quizplus · Accepted Answer

To determine the current year depreciation deduction, we need to know the depreciable basis of the property. The depreciable basis of the property is the original cost of the building (excluding the value of the land) minus any accumulated depreciation.

Assuming straight-line depreciation over 27.5 years (the standard for residential rental property), the accumulated depreciation for 10 years would be:

($1,000,000 / 27.5 years) x 10 years = $363,636

So the depreciable basis would be:

$1,000,000 - $363,636 = $636,364

The current year depreciation deduction would be:

($636,364 / 27.5 years) x 2 months (since it was sold on October 31) = $4,620

But because the property was sold, depreciation deductions must be prorated for the year of disposition according to the IRS's "mid-month convention." Under this convention, the property is assumed to have been sold in the middle of the month, and depreciation deductions are allowed for one-half the month of acquisition and one-half the month of disposition.

So the actual current year depreciation deduction would be:

($636,364 / 27.5 years) x 2/12 (for 2 months of use) x 1/2 (for the mid-month convention) = $7,420

Therefore, the best choice is D. ($28,785 is not a possible option and the other two options are not calculated correctly).

Atiqa Took Out of Service and Sold a Residential Rental