Can someone please explain how to figure this out. Is there a formula?
On August 2, 2012, Wendy purchased a new office building for $3.7 million. On October 1, 2012, she began to rent out office space in the building. On July 15, 2016, Wendy sold the office building. Determine Wendy's cost recovery for 2012. Determine Wendy's cost recovery for 2016.
To determine Wendy's cost recovery for 2012, we need to calculate the depreciation expense for the office building that year.
Cost Recovery is another term for depreciation, which is the allocation of the cost of an asset over its useful life.
Firstly, we need to determine the useful life of the office building. The useful life is typically determined by the Internal Revenue Service (IRS). Let's assume the useful life of the office building is 39 years.
Now, we can use the straight-line depreciation method to calculate the depreciation expense for each year.
To calculate the depreciation expense for 2012:
Step 1: Determine the depreciable basis.
The depreciable basis is the original cost of the asset minus any salvage value. In this case, Wendy purchased the office building for $3.7 million, and we'll assume there is no salvage value. Therefore, the depreciable basis is $3.7 million.
Step 2: Divide the depreciable basis by the useful life.
$3.7 million / 39 years = $94,871.79 per year
So, Wendy's cost recovery (depreciation expense) for 2012 is $94,871.79.
To determine Wendy's cost recovery for 2016, we need to do the same calculation but for the year 2016.
Step 1: Determine the depreciable basis.
The depreciable basis is still $3.7 million.
Step 2: Divide the depreciable basis by the useful life.
$3.7 million / 39 years = $94,871.79 per year
Again, Wendy's cost recovery (depreciation expense) for 2016 is $94,871.79.
Please note that this example assumes the straight-line depreciation method and a useful life determined by the IRS. It's essential to consult a tax professional for accurate and specific advice related to your situation.
To determine Wendy's cost recovery for 2012 and 2016, we need to use the concept of depreciation. Depreciation is the gradual decrease in the value of an asset over its useful life. The IRS provides guidelines for calculating depreciation for taxable purposes.
For 2012:
To calculate the cost recovery for 2012, we need to identify the depreciable basis of the asset, which is the portion of the purchase price that can be depreciated. In this case, we assume the entire purchase price of $3.7 million is depreciable.
The tax code defines the useful life for commercial real estate as 39 years. Thus, we will use the straight-line method to allocate the cost over the 39-year period.
To determine the depreciation for 2012, we divide the depreciable basis ($3.7 million) by the useful life (39 years).
Depreciation for 2012 = $3,700,000 / 39 = $94,871.79
Therefore, Wendy's cost recovery for 2012 is $94,871.79.
For 2016:
To determine the cost recovery for 2016, we need to consider the number of years the building was held and the remaining useful life at the time of sale.
Wendy purchased the office building on August 2, 2012, and sold it on July 15, 2016. The building was held for 3 years and 11 months, approximately 3.92 years.
To calculate the remaining useful life at the time of sale, we subtract the number of years the building was held from the total useful life.
Remaining useful life at the time of sale = 39 years - 3.92 years = 35.08 years
Using the straight-line method, we divide the depreciable basis ($3.7 million) by the remaining useful life.
Depreciation for 2016 = $3,700,000 / 35.08 = $105,507.92
Therefore, Wendy's cost recovery for 2016 is $105,507.92.
Note: It's important to consult a tax professional or refer to the relevant tax laws for accurate and up-to-date information on depreciation and cost recovery calculations, as tax rules may vary based on jurisdiction and specific circumstances.