Problem 8-32 (Algorithmic) (LO. 1, 2) José purchased a house for $189,900 in 201
ID: 2556216 • Letter: P
Question
Problem 8-32 (Algorithmic) (LO. 1, 2)
José purchased a house for $189,900 in 2013. He used the house as his personal residence. In November 2016, when the fair market value of the house was $350,800, he converted the house to rental property.
Complete the items below.
If required, round your answers to the nearest dollar.
Click here to access the depreciation tables in the textbook.
a. What is José's basis for cost recovery of the property?
b. Under MACRS, the cost recovery period for residential rental real estate is 27.5 years, and it is subject to the mid-month convention.
c. What is the cost recovery for 2016
Explanation / Answer
Answer to Question Number a.
Jose's basis for cost recovery of the property should be the purchase price of the house when he purchased the house in 2013 i.e. $189,900. This is because the purchase price of the house i.e. $189,900 is less than the fair market value of the house i.e. $350,800 as on the date of conversion of the house from personal use to the rental property.
Answer to Question Number c.
Cost recovery for 2016 will be = Basis for cost recovery amount * Depreciation rate
= $189,900 * 2.879%
= $5,467