California Real Estate Practice Exam

Mr. E purchased property for $150,000 (Improvement 80%: Land Ratio 20%). If he used the straight-line method of depreciation with 35 years remaining life, what would be the adjusted basis of the property after 10 years?

1. $85,408

2. $106,760

3. $110,204

4. $115,714

The correct answer is: $85,408

To determine the adjusted basis of the property after 10 years using the straight-line method of depreciation, you first need to calculate the annual depreciation expense based on the cost allocation between the improvement and the land. Mr. E's property is valued at $150,000 with 80% attributed to improvements and 20% to land. This breakdown means the value of the improvements is $120,000 (80% of $150,000) and the land is valued at $30,000 (20% of $150,000). The straight-line method of depreciation involves dividing the cost of the improvements by the useful life of the improvements. In this case, the remaining life of the improvements is 35 years. Therefore, the annual depreciation expense for the improvements would be: Annual Depreciation = Cost of Improvements / Remaining Useful Life Annual Depreciation = $120,000 / 35 = $3,428.57 (approximately) Over the span of 10 years, the total accumulated depreciation would be: Total Depreciation Over 10 Years = Annual Depreciation * Number of Years Total Depreciation Over 10 Years = $3,428.57 * 10 = $34,285.71