Depreciator purchases a piece of improved real property at a cost of $500,000 of

Question

Depreciator purchases a piece of improved real property at a cost of $500,000 of which $400,000 is attributable to the building and $100,000 to the land. Depreciate immediately rents the property to others. Compute Depreciation depreciation in 2017, i.e, the year after the building's acquisition (assuming the real property is placed in service as a rental property for 2016 and 2017, in the following situations (assume that Depreciator does not make any elections under any of IRC 168(g), 168(k), 179

a) The building is an apartment building

b) The building is an office building

c) What "applicable convention" did Depreciator use in 2016 when she initially purchased the real property and placed it in service

Explanation / Answer

a.

This is residential real property per Section 168(e)(2)(A) if 80% of the gross rental income is from dwelling units and it is not a hotel used for a transient basis, so it is assigned a 27.5 year life per Section 168(c)(1). The straight-line method of depreciation must be used per Section 168(b)(3)(A). Assuming the property was placed in service in January, the mid-month convention is used per Section 168(d)(2) and (4)(B). Depreciation in the subsequent year is $14,545.45 ($400,000/27.5 * 1).

b.

This is non residential real property per Section 168(e)(2)(B), so it is assigned a 39-year life per Section 168(c)(1) and the straight-line method of depreciation will be used per Section 168(b)(3)(B). Depreciation in the subsequent year is $10,256.41 ($400,000/39 *1).

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