CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsEasy
A client, Mr. Thompson, purchased a commercial building for $1,200,000. The land was appraised at $300,000. He incurred $50,000 in legal fees and commissions related to the acquisition. What is the depreciable basis of the building?
- A$1,250,000
- B$950,000
- C$900,000
- D$1,200,000
Show answer & explanationAnswer & explanation
Correct answer: B. $950,000
The depreciable basis of the building is the cost of the building plus acquisition costs, minus the value of the land. The land is not depreciable.
Why the other options are wrong
- A. This option incorrectly includes the land value in the depreciable basis.
- C. This option incorrectly excludes the acquisition costs.
- D. This option incorrectly includes the land value and excludes acquisition costs.
Depreciable Basis of Real Property
The amount on which depreciation can be claimed for real estate, typically the cost of the building plus allocable acquisition costs, excluding the value of the land.
- Land is never depreciable.
- Acquisition costs (legal fees, commissions) are added to the basis.
- Basis is allocated between land and building.
Memory trick: Building's Base: Cost - Land + Extra.