Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?
A)$493,783
B)$496,825
C)$496,958
D)$500,000
E)None of the above

Question

Quizplus · Accepted Answer

The adjusted basis is calculated by subtracting the depreciation taken from the original purchase price. Steve deducted $3,042 in Year 1, and even though he didn't deduct depreciation in Year 2, the allowable depreciation of $3,175 must still be subtracted. Thus, the adjusted basis is $500,000 - $3,042 - $3,175 = $493,783.

Steve Purchased His Home for $500,000