Kaskar Company, a calendar year taxpayer, paid $3,350,000 for a residential apartment complex and allocated $350,000 of the cost to the land and $3,000,000 of the cost to the building. Kaskar place the realty in service on September 29. Compute Kaskar's first-year depreciation on the realty.

Question

BlackTom AI · Accepted Answer

We’re told Kaskar Company paid 3,350,000 total for a residential apartment complex, with 350,000 allocated to land (nondepreciable) and 3,000,000 allocated to building (the basis for depreciation). The building is a residential rental property placed in service on September 29, so only the building basis is depreciable, using the 27.5-year straight-line method under MACRS with the mid-month convention.

Step 1: Determine depreciation basis and annual depreciation
- Depreciation basis (cost allocated to building) = 3,000,000.
- Annual depreciation under MACRS for residential rental property = 3,000,000 / 27.5 years = 109,090.909... per year.

Step 2: Apply the mid-month convention for first-year depreciation
- With the mid-month convention, you treat the property as placed in service in the middle of the month of September.
- For the first year, depreciation is prorated by the fraction of the year the property is considered depreciable. Under mid-month, the first-year depreciation counts 0.5 month for September plus full months October, November, and December, but since September is counted as a half-month, the total months of depreciation in the first year are 0.5 + 3 = 3.5 months.
- Therefore, first-year depreciation factor = 3.5 / 12 = 0.2916667.

Step 3: Compute first-year depreciation
- First-year depreciation = 109,090.909... × 0.2916667 ≈ 31,830.

Evaluation of answer choices:
- Option "$31,830$" matches the calculated first-year depreciation using the mid-month convention and 27.5-year life for residential property.
- Option "$35,544$" would correspond to a higher fraction of the year, such as taking 4 months (4/12) of depreciation, which is inconsistent with the mid-month treatment for September placement.
- Option "$22,470$" would correspond to a smaller fraction of the year, such as about 2.25 months (2.25/12) of depreciation, which is not aligned with the mid-month convention and placement in September.
- Option "None of these choices are correct" would be selected only if none of the above were valid, but the computation aligns with the standard IRS mid-month rule for residential real property.

In summary, applying the 27.5-year life, mid-month convention, and September placement yields a first-year depreciation of approximately 31,830, which corresponds to the first option.

SP25-BL-BUS-A327-1377 Quiz 10

Kaskar Company, a calendar year taxpayer, paid $3,350,000 for a residential apartment complex and allocated $350,000 of the cost to the land and $3,000,000 of the cost to the building. Kaskar place the realty in service on September 29. Compute Kaskar's first-year depreciation on the realty.

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