Question

Mr. Reynolds constructed a $500,000 income-producing building on a lot for which he paid $100,000. Mr. Reynolds financed the construction of the building by paying $100,000 cash and obtaining an 8% per annum interest rate loan for $400,000 secured by a first trust deed lien against the property. Under these conditions, Mr. Reynolds can depreciate on future income tax returns:

Answer 1

Mr. Reynolds can depreciate the depreciable cost of the income-producing building on future income tax returns.

Step-by-step explanation:

In this scenario, Mr. Reynolds constructed an income-producing building on a lot for which he paid $100,000. He financed the construction with a $400,000 loan at an 8% per annum interest rate. The building's cost, which includes the amount paid for the lot and the cash paid, is $600,000 ($100,000 + $500,000). However, the loan amount is subtracted from the building's cost, resulting in a depreciable cost of $200,000 ($600,000 - $400,000). Mr. Reynolds can depreciate this amount on future income tax returns.