On June 1, 2016, Skylark Enterprises, a calendar year LLC reporting as a sole proprietorship, acquired a retail store building for $500,000 (with $100,000 being allocated to the land). The store building was 39-year real property, and the straight-line cost recovery method was used. The property was sold on June 21, 2020, for $385,000.

The cost recovery is $__________, and the adjusted basis for the building is $_________

Answer:

Skylark Enterprises

The cost recovery is $___41,024___, and the adjusted basis for the building is $__358,976___

Explanation:

a) Data and Calculations:

Cost of retail store acquired = $500,000

Property acquisition date = June 1, 2016

Property disposal date = June 21, 2020

Length of use of property before disposal = 4 years and 21 days

Cost allocated to Land = $100,000

Cost allocated to Building = $400,000

Annual Depreciation expense = $10,256 ($400,000/39)

Cost recovery after 4 years = $41,024 ($10,256 * 4)

Adjusted basis for the building = $358,976 ($400,000 - $41,024)

b) The adjusted basis for the building is the cost of the building minus its accumulated depreciation for the number of years it has been in use.

Answer:

a) Compute the cost recovery and adjusted basis for the building.

Total cost recovery is $41,032, and the adjusted basis for the building is $358,968.

b) What are the amount and nature of Skylark's gain or loss from disposition of the property? What amount, if any, of the gain is unrecaptured § 1250 gain?

There is $73,968 of recognized loss on the sale of the property, of which none is subject to § 1250 recapture.

Explanation:

a) Take the building basis of $400,000 times the applicable MACRS percentage from table 8.8 in the Cengage text for each year.

2016: $400,000 x 0.01391 = $5,564

2017: $400,000 x 0.02564 = $10,256

2018: $400,000 x 0.02564 = $10,256

2019: $400,000 x 0.02564 = $10,256

2020: $400,000 x (0.02564*(5.5/12 months)) = $4,701

Total Cost Recovery = $41,032 (I had to round down to get it correct)

Then, take the basis minus the total cost recovery to get the adjusted basis.

$400,000 - $41,032 = $358,967 (This one needed to be rounded up...)

b) The loss on the sale is computed by taking the sales price minus the adjusted basis (plus the cost of the land).

$385,000 - ($358,967 + $100,000) = $73,968 (This one also needed to be rounded up...)

There is no 1250 recapture because:

1. The property was depreciated with straight-line, which is not eligible for recapture, and

2. because the property was sold at a loss.

Hopefully this helps! Good luck!!

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