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A group of investors has formed SandInn Corporation to purchase a small hotel. The price is $200,000 for the land and $800,000 for the hotel building. If the purchase takes place in June, com- pute the MACRS depreciation for the first three calendar years. Then assume the hotel is sold in June of the fourth year, and compute the MACRS depreciation in that year also.

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Answer:

1. Land is not to be depreciated under the Modified Accelerated Cost Recovery System (MACRS) depreciation schedule.

The Building however will be depreciated over a period of 39 years as it is considered an place of business and not a residential property.

The depreciation for such assets is 1.3% in year 1 and 40, and 2.6% for the years in-between.

Year 1 = 1.3% * 800,000

= $10,400

Year 2 = 2.6% * 800,000

= $20,800

Year 3 = 2.6% * 800,000

= $20,800

The total for the first 3 years is,

= 10,400 + 20,800 + 20,800

= $52,000

2. Depreciation in Year 4

= 800,000 * 2.6%

= $20,800

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