Question

If an investor purchases a property for $200,000, makes $100,000 in improvements, and takes $50,000 in depreciation, the investor's

a) Taxable Income increases by $100,000
b) Adjusted Cost Basis decreases to $150,000
c) Capital Gains decrease by $50,000
d) Depreciation Recapture increases by $50,000

Answer 1

The adjusted cost basis of the property after making $100,000 in improvements and taking $50,000 in depreciation would be $250,000, not $150,000 as option b) suggests. Therefore, none of the options accurately reflect the changes to the investor's financial situation.

Step-by-step explanation:

If an investor purchases a property for $200,000, makes $100,000 in improvements, and takes $50,000 in depreciation, then the investor's adjusted cost basis for the property would not decrease; instead, it would actually increase because of the improvements. The formula for adjusted cost basis after improvements and depreciation is:

Adjusted Cost Basis = Original Purchase Price + Improvements - Depreciation

In this case, the calculation would be:

Adjusted Cost Basis = $200,000 + $100,000 - $50,000 = $250,000

Therefore, the investor's Adjusted Cost Basis increases to $250,000, not decreases to $150,000. This means that the correct answer is none of the given options. The depreciation taken does not directly affect taxable income or capital gains, but it will alter the gain recognized on the sale of the property due to the depreciation recapture rules, which might lead to an increase in taxable gain upon sale. So if the property is sold, the Depreciation Recapture could potentially increase the taxable portion of any gains realized by the amount of depreciation taken, in this case, $50,000.