Question

On November 10 of year 1, Javier purchased a building, including the land it was on, to assemble his new equipment. The total cost of the purchase was $1,200,000; $300,000 was allocated to the basis of the land and the remaining $900,000 was allocated to the basis of the building. a) Using MACRS, what is Javier's depreciation deduction on the building for years 1 through 3? b) What would be the year 3 depreciation deduction if the building was sold on August 1 of year 3? c) Answer the question in part (a), except assume the building was purchased and placed in service on March 3 instead of November 10. d) Answer the question in part (a), except assume that the building is residential property. e) What would be the depreciation for 2021, 2022, and 2023 if the property were nonresidential property purchased and placed in service November 10, 2004 (assume the same original basis)?

Answer 1

Javier's depreciation deduction on the building for years 1 through 3 can be calculated using MACRS. If the building is sold in year 3, the depreciation deduction is prorated. Changing the purchase date or property type affects the method of depreciation. Depreciation for specific years can be calculated using the appropriate MACRS percentages.

Step-by-step explanation:

a) Using the Modified Accelerated Cost Recovery System (MACRS), Javier's depreciation deduction on the building for years 1 through 3 can be calculated using the appropriate MACRS depreciation percentages for each year:

1. Year 1: 2.564% x $900,000 = $23,076
2. Year 2: 4.913% x $900,000 = $44,217
3. Year 3: 3.175% x $900,000 = $28,574

b) If the building was sold on August 1 of year 3, the year 3 depreciation deduction would be calculated until the date of sale. Assuming the building was sold 60% into the year, the depreciation deduction for year 3 would be: $28,574 x 60% = $17,144.

c) If the building was purchased and placed in service on March 3 instead of November 10, the depreciation deductions would remain the same for years 1 through 3.

d) If the building is residential property, the depreciation deductions would be calculated using the applicable depreciation system for residential rental property (which is typically straight-line depreciation over 27.5 years for residential real estate).

e) If the property is nonresidential property purchased and placed in service on November 10, 2004 (assume the same original basis), the depreciation for 2021, 2022, and 2023 can be calculated using the appropriate MACRS depreciation percentages for each year.