(15 pts). A new warehouse is under construction that will rent out its space and

Question

(15 pts). A new warehouse is under construction that will rent out its space and material moving capabilities on a modular basis. The land for the warehouse will cost $1.5 Million and the building will cost $4.5 Million. The building is a MACRS 39-year asset. If the warehouse will be put into service in April of 2020, and sold in November of 2028, a) compute the annual depreciation amounts and insert them into the table below for this property. b) If the Nov. 2028 sale price for land and building is $7.5 Million, compute the gains on this sale. 1. Year Depreciation 2020 2021 2022 2023 2024 2025 2026 2027 2028

Explanation / Answer

Dear Friend,

1. Calculation of Depreciation:

Given Data are as follows:

Building Cost = $ 4,500,000

Put in to Service = April, 2020

Recovery Period = 39 Year Non - Reseidential Real Propert Asset

Depreciation Method used = General Depreciation System Straight Line { i.e, GDS SL} , (To be taken from Table - 4.1 of Publicaion Outlines)

IRS Convention = Mid - Month Convention

MACRS Depreciation Table must be taken from Table A-7a from Page - 75 of IRS 2017 Publication 946 for referencce.

In this table First Year Depreciation Rate i.e for 2020 would be = 1.6%

Second and Subsequent Years other than last year i.e from 2021 to 2058 would be = 2.56%

Last Year i.e in 2059, Depreciation Rate will be = 0.96% (2.56% - 1.6%)

Now Applying Rate

2. Computation of Gain on Sale:

Written down Value of Asset = $ 3,504,808

Sale Value = $ 7,500,000

Capital Gain made on Sale = $ 3,995,192 ($ 7,500,000 - $ 0.3,504,808)

Tax on Capital Gains as per above Chart = $ 113,900 + 0.34 ( $ 3,995,192 - $ 335,000)

= $ 113,900 + 0.34 (3,660,192)

= $ 113,900 + $ 1,244,465

= $1,358,365

Year Remaining Recovery Period Adjusting Basis Opening Balance Depreciation for the Year Closing Balance of Basis 2020 39 4,500,000 72,115 4,427,885 2021 38.375 4,427,885 115,385 4,312,500 2022 37.375 4,312,500 115,385 4,197,115 2023 36.375 4,197,115 115,385 4,081,731 2024 35.375 4,081,731 115,385 3,966,346 2025 34.375 3,966,346 115,385 3,850,962 2026 33.375 3,850,962 115,385 3,735,577 2027 32.375 3,735,577 115,385 3,620,192 2028 31.375 3,620,192 115,385 3,504,808

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