Question

On November 4, 2017, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2017 and 2018, respectively, Blue took $642 and $5,128 of cost recovery. These amounts were incorrect; Blue applied the wrong percentages (i.e., those for 39-year rather than 27.5-year assets). Blue should have taken $910 and $7,272 cost recovery in 2017 and 2018, respectively. On January 1, 2019, the asset was sold for $180,000.

Enter the values for each item below. If required, round all computations to the nearest dollar.
a. The adjusted basis of the asset at the end of 2018 is $.
b. The cost recovery deduction for 2019 is $.
c. The__________ on the sale of the asset in 2019 is $

Answer 1

A) The asset's cost was $200,000 in 2017

minus recovery costs for 2017 and 2018 ($910 + $7,272 = $8,182)

cost basis at December 31, 2018 = $200,000 - $8,182 = $191,818

B) the recovery cost for 2019 = $200,000 x (1 / 27.5) x (0.5 / 12) = $303

C) the asset's basis on the date of sale is = $191,818 - $303 = $191,818

Sales price - asset basis = $180,000 - $191,818 = $11,515 loss

Blue Company lost $11,515 when it sold the asset.