California Real Estate Practice Exam

An investor in an eight-year-old apartment building will be allowed by the IRS to calculate depreciation by which of the following methods?

1. Cost method

2. Income method

3. Straight-line method

4. None of the above

The correct answer is: Cost method

The correct method for calculating depreciation on an eight-year-old apartment building, as allowed by the IRS, is the straight-line method. This method is commonly used for residential and commercial properties and involves deducting an equal amount of depreciation expense each year over the useful life of the property. In the case of residential rental property, the IRS specifies a useful life of 27.5 years, which means that the investor would take the cost basis of the building (excluding land value) and divide it by 27.5 to arrive at the annual depreciation expense. While the cost method pertains to calculating asset values based on acquisition costs, it does not relate directly to the depreciation calculation process. The income method, often used in appraisals, assesses value based on the potential income generated by the property rather than on tangible depreciation calculations. Therefore, the straight-line method is the most appropriate choice for this type of investment property.