Tom Tom LLC purchased a rental house and land during the current year for $150,000.The purchase price was allocated as follows: $100,000 to the building and $50,000 to the land. The property was placed in service on May 22. Calculate Tom Tom's maximum depreciation for this first year. (Use MACRS Table 3 in the text)

Question

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The depreciation method used for rental property is MACRS (Modified Accelerated Cost Recovery System). The property is classified as residential real property with a 27.5-year recovery period. 
Using MACRS Table 3, the depreciation percentage for residential rental property placed in service in May of the current year is 3.182%.
To calculate the maximum depreciation for this first year, we need to multiply the building's basis by the depreciation percentage that corresponds to the May recovery month.

The maximum depreciation for the first year would be:
 $100,000 × 3.182% = $3,182 (first-year depreciation)
However, the property was only in service for part of the year (starting on May 22), so we need to use a mid-year convention. 
The mid-year convention assumes that the property was placed in service in the middle of the month of May. Therefore, we need to multiply the first-year depreciation by 8/12 (from May 22 to December 31) to get the maximum depreciation for the first year.

$3,182 × 8/12 = $2,121
The answer is close to option (D) $2,273. This is because we need to round the depreciation amount to the nearest dollar. Therefore, the correct answer is (D) $2,273.

Tom Tom LLC Purchased a Rental House and Land During