An industrial property is valued at $475,000. The land value is 15% of the total value. Calculate the annual IRS depreciation deduction. (round the the nearest dollar)
The correct answer and explanation is:
Let’s break down the problem step-by-step:
Given:
- Total industrial property value = $475,000
- Land value = 15% of total value
- Annual IRS depreciation deduction needed (assuming standard IRS depreciation rules for industrial property)
Step 1: Calculate the land value
Since the land value is 15% of the total property value: Land value=0.15×475,000=71,250\text{Land value} = 0.15 \times 475,000 = 71,250
Step 2: Calculate the building value
The building value is the remaining value after subtracting the land value: Building value=475,000−71,250=403,750\text{Building value} = 475,000 – 71,250 = 403,750
Step 3: Determine the depreciation method and period
For industrial properties, the IRS uses the Modified Accelerated Cost Recovery System (MACRS).
- Non-residential real property (like industrial buildings) uses a straight-line depreciation over 39 years.
- Land is not depreciable.
Step 4: Calculate the annual depreciation deduction
Using straight-line depreciation: Annual depreciation=Building valueDepreciation period=403,75039≈10,357.69\text{Annual depreciation} = \frac{\text{Building value}}{\text{Depreciation period}} = \frac{403,750}{39} \approx 10,357.69
Rounded to the nearest dollar: 10,358\boxed{10,358}
Explanation
Depreciation is an IRS-allowed deduction that lets property owners recover the cost of income-producing property over time. Since land does not depreciate, it is excluded from the calculation.
Industrial buildings are classified as non-residential real property and depreciated on a straight-line basis over 39 years. This means the owner deducts an equal amount every year until the property is fully depreciated.
By subtracting the non-depreciable land portion (15% in this case) from the total property value, we isolate the building’s depreciable basis.
Dividing this by 39 years gives the annual deduction, which helps reduce taxable income and thus the tax burden for the property owner.
Summary:
- Total value: $475,000
- Land (non-depreciable): $71,250
- Building (depreciable): $403,750
- Annual IRS depreciation deduction: $10,358