Question

Essentials of Federal Income Taxation 21, MACRS, Real Property. (Obj. 1) On April 3, 1993, a taxpayer purchased land and an office building for $350,000 ($75,000 of the $350,000 is allocated to the land). On August 2. 2019, the taxpayer sold the office building. Compute MACRS on the building for 2018, and the taxpayer's adjusted basis in the office building at the time of the sale.

Answer 1

We can answer the question by splitting the question into 2 parts.

Requirement 1:-

MACRS Depreciation on Building for 2018 :-

Per IRS, Office building is depreciated over 39 years and is classified as a Non residential Real property. Hence, the depreciation expense for the year 2018 is calculated as follows:-

Basis allocated to office building = $350,000 - $75,000 = $275,000

Non Residential real property is depreciated under a 39 year asset life using the Mid Month convention. Under the Mid month convention , an asset sold during the month is considered to have been in use for half of the month and hence, depreciation expense would be limited to 50%

Depreciation expense for office building for 2018 = $275,000 * 2.564% * 50% = $3,525.5

MACRS Depreciation expense for office buiding for 2018 = $3,526(Rounded)

Requirement 2:-

Adjusted based in the land at the time of sale:

Depreciation expense for 1993 :- $275,000 * 1.819% = $5,002(Rounded)

Depreciation expense per year between 1994 - 2018 = $275,000 * 2.564% = $7,051

Depreciation expense between 1994 - 2018 = $7,051 * 25 years = $176,275

Depreciation expense for 2019 = $3,526

Total Depreciation expense between 1993 - 2019 = $5,002 + $176,275 + $3,526

Total Depreciation expense = $184,802.75

Total Depreciation expense = $184,803(Rounded)

Adjusted Basis = $275,000 - $184,803

Adjusted Basis in Building = $90,197

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