Question

On July 16, 2016, Logan acquires land and a building for 500,000 to use in his sole proprietorship. Of the purchase price,400,000 is allocated to the building, and 100,000 is allocated to the land. Cost recovery of4,708 is deducted in 2016 for the building (nonresidential real estate).

a. What is the adjusted basis for the land and the building at the acquisition date?
b. What is the adjusted basis for the land and the building at the end of 2016?

Answer 1

The adjusted basis for the land at acquisition and end of 2016 is $100,000, as land does not depreciate. The adjusted basis for the building is initially $400,000, and after deducting the depreciation of $4,708 for 2016, it becomes $395,292.

Step-by-step explanation:

When Logan acquires land and a building on July 16, 2016, for his sole proprietorship, he spends a total of $500,000. The purchase price allocation is $400,000 for the building and $100,000 for the land.

a. At the acquisition date, the adjusted basis for the land is $100,000, as the land is not subject to depreciation. The adjusted basis for the building is $400,000, the initial cost allocated to the building.

b. At the end of 2016, the adjusted basis for the land remains at $100,000 as it does not depreciate. The adjusted basis for the building at the end of 2016 is calculated by taking the initial basis of $400,000 and subtracting the cost recovery (depreciation) of $4,708 that was deducted for that year. Therefore, the adjusted basis for the building is $400,000 - $4,708 = $395,292.