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Calculate depreciation: Ted's business and rental property

Ted is in the real estate business and owns rental property. On May 12, 2007, Ted purchased a small apartment building for $200,000 ($180,000 for the building and $20,000 for the land). In addition, Ted purchased equipment (5-year recovery) costing $60,000 on April 10,2007, and machinery (7-year recovery) costing $80,000 on November 1, 2007. All assets were placed in service in 2007.

a. What is the MACRS depreciation deduction for each asset in 2007 and 2008 assuming Ted does not elect the Sec. 179 expensing election?

b. Compute the MACRS depreciation deduction on the 5-year and 7-year property for 2007 and 208 if Ted elects the maximum Sec. 179 deduction in 2007 by expensing $32,000 of the 5-year property and $80,000 of the 7-year property.

Solution Preview

Ted has two activities, as I read the question. He reports on Sch C and Sch E, business and passive activity. Section 179 is not allowable for passive activities, which is why I wanted to clarify the difference between the two sources of income. Based on part b, we can assume the equipment and machinery is for his Sch C business.

Rental real estate is depreciated over 27.5 years using straight line under MACRS. Land is never depreciated because it doesn't wear out

For 3, 5 and 7 ...

Solution Summary

The solution explains the concepts of rental property depreciation as well as Section 179 for business assets. The charts and the calculations are included in the solution.