Della purchased a warehouse on February 25, 2015, for $350,000. $45,000 of the price was for the land. What is her cost recovery deduction for 2015 rounded to the nearest dollar?
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To find the cost recovery deduction for 2015, we need to calculate the depreciable basis of the warehouse. The depreciable basis is the value of the warehouse, excluding the cost of the land.
Given:
Purchase price of the warehouse = $350,000
Cost of land = $45,000
The depreciable basis of the warehouse is calculated by subtracting the cost of the land from the purchase price:
Depreciable basis = Purchase price - Cost of land
Depreciable basis = $350,000 - $45,000
Depreciable basis = $305,000
Now, we can calculate the cost recovery deduction. Cost recovery deduction is the portion of depreciable basis that can be claimed as a deduction over time.
For commercial properties like warehouses, the cost recovery period is 39 years. Hence, the depreciation deduction each year is determined by dividing the depreciable basis by the cost recovery period.
Cost recovery deduction = Depreciable basis / Cost recovery period
Cost recovery deduction = $305,000 / 39
Rounded to the nearest dollar, the cost recovery deduction for 2015 is $7,821.
To calculate Della's cost recovery deduction for 2015, we need to determine the depreciable value of the warehouse and then apply the appropriate depreciation rate. The depreciable value of the warehouse is the total purchase price minus the portion allocated to the land.
Step 1: Calculate the depreciable value of the warehouse:
Depreciable value = Total purchase price - Land portion
= $350,000 - $45,000
= $305,000
Step 2: Determine the depreciation rate:
The IRS provides a Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation for commercial properties. For a nonresidential real property like a warehouse, the recovery period is 39 years.
Step 3: Apply the depreciation rate to calculate the cost recovery deduction:
Depreciation expense = Depreciable value / Recovery period
= $305,000 / 39
To round the result to the nearest dollar, we need to determine whether the decimal portion is closer to zero or one. If the decimal portion is greater than or equal to 0.5, we round up; otherwise, we round down.
In this case, the decimal portion would be:
Decimal portion = (Depreciation expense - Rounded down depreciation expense)
= (Depreciable value / Recovery period) - Rounddown(Depreciable value / Recovery period)
Now, let's perform the calculations to get the final result:
Depreciation expense = $305,000 / 39
= $7,820.51
Rounded down depreciation expense = Rounddown($305,000 / 39)
= $7,820
Decimal portion = $7,820.51 - $7,820
= $0.51
Since the decimal portion is less than 0.5, we round down the depreciation expense.
Therefore, Della's cost recovery deduction for 2015, rounded to the nearest dollar, is $7,820.