Section 1231 Cost Recovery

Question 1

What type of property is and isn’t depreciable?

Answer 1

• Business and income producing property are

- Personal and investment use assets are not

Question 2

What depreciation method do we use for personalty?

Answer 2

-200% or 150% Declining Balance

Question 3

What depreciation method do we use for realty?

Answer 3

-Straight line

Question 4

Define realty.

Answer 4

-Land and other assets affixed thereto

Question 5

Define personalty.

Answer 5

-Tangible asset that can be moved

Question 6

What conventions do we use for personalty? Realty?

Answer 6

• Personalty: Midyear convention

- Realty: Mid month convention

Question 7

Give examples of 3, 5, and 7 year personalty.

Answer 7

• 3 year: Race horses
• 5 year: Automobiles, trucks, computers and peripheral equipment, office equipment
• 7 year: Office furniture and fixtures, agricultural and other machinery

**200% Declining balance for these three classes

Question 8

How do we depreciate land improvements?

Answer 8

-Over 15 years using 150% declining balance method

Question 9

Over how many years do we depreciate residential and non-residential realty?

*Remember straight line

Answer 9

• Residential: 27.5 years

- Non-residential: 39 years

Question 10

Describe the mid-quarter convention.

Answer 10

-Used for all new personalty when more than 40% of PERSONALTY acquired during year purchased during last quarter of year

Question 11

What is the Section 179 election?

Answer 11

• Election to expense limited amount of tangible personalty if used in a trade activity
• Maximum amount expensed in any year is lesser of business income or $500,000
• Election in excess of business income carried forward indefinitely
• Phased out dollar for dollar if qualified asset purchases exceed $2,000,000
• Carry forward not allowed if due to excess purchase provision

Question 12

What are alternatives to MACRS for personalty?

Answer 12

-Straight line over MACRS life of asset

Question 13

What is listed property?

Answer 13

• Assets such as computers and vehicles used commonly for both business and personal purposes
• Does NOT include cellphones

Question 14

How do we depreciate listed property?

Answer 14

• If business use EXCEEDS 50% of total use (not including investment use), use MACRS for business and investment use
• If not, use straight line for business and investment use
• Once 50% test failed it will not be revoked

Question 15

How do we amortize intangible assets acquired not created? Give examples of these assets.

Answer 15

• Straight line over 15 years

- Goodwill, going concern value, information bases, franchises, trademarks, covenants not to compete, etc.

Question 16

How do we treat organization and start up expenses?

Answer 16

• $5,000 may be deducted but phased out dollar for dollar for expenses over $50,000
• Expenses not deducted must be capitalized and amortized over 180 months
• Syndication expenses must be capitalized but NOT amortized

Question 17

Does MACRS include salvage value in computations?

Answer 17

-No, MACRS ignores salvage value