Final answer:
To calculate the cost recovery deduction for 2023 and 2027, Rod must use the Modified Accelerated Cost Recovery System with a recovery period of 39 years for non-residential real property and prorate the depreciation for the months the property was in service for each year.
Step-by-step explanation:
Rod paid $1,950,000 for a new warehouse on April 14, 2023. He sold the warehouse on September 29, 2027. To determine the cost recovery deduction for 2023 and 2027, we must use the Modified Accelerated Cost Recovery System (MACRS) which is a method of depreciation for tax purposes in the United States.
The warehouse is considered non-residential real property under MACRS, which has a recovery period of 39 years using straight-line depreciation. Since Rod placed the property in service in April and sold it in September four years later, he will have to calculate the partial year's depreciation for both the first and last year.
For 2023, since the warehouse was placed in service in April, Rod will claim depreciation for a portion of the year (April-December). For 2027, the depreciation calculation will similarly be prorated for the portion of the year (January-September).
To calculate the exact deduction amounts, Rod will need to use the applicable convention (mid-month, mid-quarter, or half-year) as prescribed by the IRS for the property's first and last year of service.