R2 M3- Cost Recovery Flashcards
5-year Property: Cars, light, trucks, computers, copiers (Half year or mid- quarter).
7-year Property: Office furniture, fixtures, equipment (Half year or mid- quarter).
27.5-year Property: Residential real estate (Mid-month)
39-year Property: Non-residential real estate
Examples
- 39-year Property: (Storage facility , Warehouse)
- 5-year Property: Cars, light, trucks, computers, copiers, delivery truck, Delivery van.
- Intangible Property (Goodwill)
- 7 year Property: Forklift
5-year Property: Cars, light, trucks, computers, copiers (Half year or mid- quarter).
7-year Property: Office furniture, fixtures, equipment (Half year or mid- quarter).
27.5-year Property: Residential real estate (Mid-month)
39-year Property: Non-residential real estate
Examples
- 39-year Property: (Storage facility , Warehouse)
- 5-year Property: Cars, light, trucks, computers, copiers, delivery truck, Delivery van.
- Intangible Property (Goodwill)
- 7 year Property: Forklift
Continuation of question 2–> Side note we don’t mix real property and personal property for MACRS Depreciation.
This is the mid-quarter for the four quarter because it was put in service in October
I confused the mid-month month period service vs the year in the half year convention. For example: half year convention Oct year 5 ( first time its place into service ) in the table you would start in year 1 as the first year its placed in service. In terms of the year its applicable for mid-month as well
This follows flash card 3 with the mid-quarter but this time its the mid-quarter for the third quarter. It was put in service in September. They are in the same year it was put in service Year 5
What type of property do we have:
- Personal property (things you can touch but not land or building)
- Real property (things you can touch that are land or building)
- Intangible Property (things you can’t touch)
Basis * MACRS Depreciation Factor = Current year cost recovery
Special issues:
- Land is never depreciated
- MACRS table account for the depreciation
Deprciable lives (most common)
Personal property:
- 5 years (Computer equipment, automobiles
- 7 years - Furniture, fixtures, machinery, and equipment
Real property:
- 27.5 years - Residential real property: (you can live in it).
- 39 years - Nonresidential property (you can’t live in it) –> warehouse, storage facility.
Intangible property:
- 180 months (15 years) for most intangible (but not all)
MACRS Conventions (stick with assets based on year of purchase):
Personal Property:
- Half year (default)
- Mid- quarter ( if more than 40% of personal property was placed in service in 4th quarter)
Real Property:
- mid month (more specific)
Intangible property:
- Full month
Choice “D” is correct. The computer is 5-year property. It was purchased in Year 3, so that is recovery period 1. The MACRS depreciation for Year 3 is $1,000 ($5,000 × 20%). Note that the half-year convention is built into the table. No adjustment is necessary.
Choice “A” is incorrect. $500 would be correct if we used 10% for 10-year property.
Choice “B” is incorrect. $715 would be correct if we used 14.29% for 7-year property.
Choice “C” is incorrect. $960 would be correct if we used 19.2% for recovery period 3.
Charlie purchased an apartment building on November 16, Year 1, for $1,000,000. Determine the cost recovery for Year 20.
A. $36,360 B. $4,550 C. $3,210 D. $25,640
Choice “A” is correct. $1,000,000 × 0.03636 = $36,360. The apartment building is residential rental real property, so it is 27.5-year recovery property, and the recovery year is the 20th year. The depreciation rate is 0.03636, which is the straight-line rate for 27.5 years (1 / 27.5 = 0.03636).
Choice “B” is incorrect. This option is the amount of depreciation in Year 1 for residential rental real property using the mid-month convention and does not calculate a full year of depreciation, which is allowed in Year 20. The Year 1 MACRS depreciation rate is 0.00455 (1/27.5 years = 0.03636 × 1.5 months/12 months = 0.00455). $1,000,000 × 0.00455 = $4,550.
Choice “C” is incorrect. This option is the amount of depreciation in Year 1 for nonresidential real property using the mid-month convention. The Year 1 MACRS depreciation rate for nonresidential real property placed in service during the 11th month is 0.00321 (1/39 years = 0.02564 × 1.5 months/12 months = 0.00321). $1,000,000 × 0.00321 = $3,210. However, Year 20 should have a full year of depreciation at the 27.5-year rate for residential rental real property.
Choice “D” is incorrect. This option uses the MACRS depreciation rate for nonresidential real property of 0.02564, which is the straight-line rate for 39 years (1/39 = 0.02564). $1,000,000 × 0.02564 = $25,640. The apartment building is residential rental real property, which is a 27.5-year recovery property.
Alex purchased rental property on July 29, Year 6, for $456,000. The price included an amount of $90,000 allocated to land. Alex immediately rented the property to a family to live in. How much depreciation can Alex deduct in Year 6 for the property?
A.$9,385 B. $13,309 C. $4,301 D. $6,100
Choice “D” is correct. The $90,000 amount allocated to land is not depreciated. So the depreciable basis is $366,000. This is depreciated straight-line over 27.5 years because this is residential property. The mid-month convention is used for real estate. Year 6 depreciation is $6,100 ($366,000/27.5 x 5.5 months/12).
Choice “A” is incorrect. $9,385 would be correct for future years if this were nonresidential property depreciated over 39 years ($366,000/39).
Choice “B” is incorrect. $13,309 would be correct for future years ($366,000/27.5).
Choice “C” is incorrect. $4,301 would be correct if this were nonresidential property depreciated over 39 years ($366,000/39 x 5.5 months/12).
