Question

Gretta has moved on from her CPA career and now runs her own company, having acquired it from a former client who was retiring. It is engaged in light manufacturing, assembly and distribution of small parts to the automotive industry. She holds a majority of the corporate stock in GD Ventures, Inc., with her business partner, Dieter, holding the remaining shares. They formed a limited liability company as equal partners to purchase and manage the land and building that the company operates in. The LLC leases the real estate to GD Ventures.

Gretta and Dieter each contributed $50,000 to the LLC in January 2015. They obtained a mortgage loan from a local bank for $400,000, and purchased the land and building from the prior business owner for $500,000. The LLC has recognized the allowable straight line depreciation on a 39 year life since 2015.

This year they have been approached by a group of real estate investors that want to buy the real estate and then lease it to GD Ventures. They have offered $800,000 for the real property.

1. Ignoring partial year conventions in the depreciation rules and treating 2015 as a full year of depreciation, how much depreciation has been taken on the real estate at the end of 2019?
   
2. What would be the taxable gain on the sale of the property if Gretta and Dieter accept the offer?
   
3. Would the gain on sale be long term or short term?
   
4. If Gretta’s salary and share of profits from the business is $1 million and she has no substantial tax deductions, what is her personal marginal tax rate on ordinary income?

Answer 1

A. Straight Line Depreciation is computed as per the following formula :

(Cost of Asset - Net realisable value at the end of the useful life)/ Useful Life of the Asset

In the instant case the cost of asset is $500000 and the net realisable value is assumed to Zero. Since the Depreciation is over 39 years per year depreciation is worked out as : $500000/39 i.e $12820.51 per year.

Since Depreciation per year is $12820.51 then for 5 years from 2015 till end 2019 it works out to $12820.51*5 which is 64102.56

B. Taxable gain will be computed as Offer less the depreciated value as of end 2019.

Offer : $800000