Paola purchased an office building on January 5,2015,for $450,000.$30,000 of the price was for the land.On September 25,2017,he sold the office building.What is the cost recovery deduction for 2017 rounded to the nearest dollar?

Question

Quizplus · Accepted Answer

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

Depreciable basis = Purchase price - Land cost
Depreciable basis = $450,000 - $30,000
Depreciable basis = $420,000

The office building was sold on September 25, 2017, so the cost recovery deduction for 2017 will be for only a portion of the year. We need to calculate the depreciation for 8.75 months (January 1 to September 25).

Using the straight-line method, the annual depreciation for the office building is:

Annual depreciation = Depreciable basis / Useful life
Useful life for an office building is 39 years (according to the IRS)
Annual depreciation = $420,000 / 39 years
Annual depreciation = $10,769.23

The depreciation for 8.75 months would be:

Depreciation for 8.75 months = (8.75 / 12) x $10,769.23
Depreciation for 8.75 months = $7,628.21

Rounding to the nearest dollar, we get the answer of (C) $7,628.

Paola Purchased an Office Building on January 5,2015,for $450,000