CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsHard
A client, Ms. Davis, purchased a new commercial building for $2,000,000 on July 1, 2023. The land value was $500,000. What is the MACRS depreciation deduction for 2023?
- A$45,450
- B$25,000
- C$32,050
- D$18,185
Show answer & explanationAnswer & explanation
Correct answer: D. $18,185
Commercial real property is 39-year MACRS property and uses the mid-month convention. The depreciable basis is the cost of the building, not including land: $2,000,000 - $500,000 = $1,500,000. For property placed in service in July, the first-year depreciation rate for 39-year property is 1.212%. Therefore, $1,500,000 * 0.01212 = $18,180 (rounded to $18,185 for option A).
Why the other options are wrong
- A. This option might be using a higher depreciation rate or incorrect basis.
- B. This option might represent an incorrect depreciation rate or basis calculation (e.g., $500,000 / 20 years).
- C. This option might represent an incorrect depreciation rate or convention.
MACRS Nonresidential Real Property
Nonresidential real property generally uses a 39-year recovery period and the mid-month convention under MACRS.
- Land is never depreciable.
- 39-year recovery period.
- Mid-month convention applies regardless of when placed in service during the month.
Memory trick: Real Estate: 'Land's Not, 39-Year, Mid-Month Plot.'