Question

LeBron purchased a rent house for $200,000 on October 1, 2012 by paying cash of $20,000 and signing a note for $180,000. The land was valued at $80,000; building, $120,000. The property was sold on April 1, 2020 for cash of $90,000 and relief of the note that had a balance of $165,000.

1. How much depreciation can LeBron claim in 2012, 2013 – 2019, and 2020?

b. How much is LeBron’s gain realized?

Answer 1

The cost of an asset is deducted to its useful life for a long period of time, which is known as depreciation.

A. Depreciation claim for 2013- 2020:

Since their is no useful life for rental properties, IRS says to treat them to have a useful life of 27.5 years.

Calculation:
Cost = 200,000 (cash=20,000 and signing note = 180,000)
Land value = 80,000
Building value = 120,000

Original cost = 20000(cash) and 15000(notes) = 35000
Depreciation = Cost - Land value / 27.5
= 35000 - 80000/ 27.5 = 1636.36 (for years 2013- 2020)

B. Gain Realized : Cost = 35,000, Re-sale value = 90,000
= 35000 - 90000
= 55,000