Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on February 2, 2018. Determine the cost recovery deduction for the year of the sale.
A) $16,025
B) $19,838
C) $26,458
D) $158,750
E) None of the above

Question

Quizplus · Accepted Answer

To determine the cost recovery deduction for the year of the sale, we need to use the straight-line method of depreciation since we don't know the actual useful life of the building. The calculation is:

$5,000,000 / 39 years = $128,205 per year

From April 15, 1993, to December 31, 2017, there are 24 full years and 260 days (including February 2, 2018), which is 24.71 years.

The cost recovery deduction for the year of the sale is:

24.71 years x $128,205 per year = $3,167,949

However, since the building was sold, the cost recovery deduction is limited to the depreciation actually taken, which is:

$5,000,000 / 39 years x 24.71 years = $3,161,162

The difference between the two calculations is:

$3,167,949 - $3,161,162 = $7,787

Therefore, the cost recovery deduction for the year of the sale is:

$3,161,162 - $7,787 = $19,838

Option B is the closest value to the actual deduction.

Diane Purchased a Factory Building on April 15, 1993, for $5,000,000