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00:00:00 – 00:10:20
The video discusses the mid-month convention for depreciating real property, primarily focusing on its application within accounting education and CPA exam preparation. Real property, which includes buildings and warehouses but not land, is categorized into residential rental property with a 27.5-year class life, and non-residential property with a 39-year class life. Both types use the straight-line method of depreciation. The mid-month convention means properties are treated as if they were put into use on the 15th of the month of acquisition, affecting the prorating of depreciation in the initial and final years. Examples provided include a residential property purchase in April and a commercial property purchase in November, illustrating the prorated depreciation calculations. The video emphasizes understanding these principles, particularly for CPA candidates, and suggests using additional educational resources for effective learning.
00:00:00
In this segment of the video, the presenter introduces Forehead Accounting Lectures, a supplemental educational tool for those preparing for CPA exams and accounting courses. The resource includes lectures, multiple-choice questions, true/false questions, and exercises aligned with popular CPA review courses and accounting curriculums. The video then shifts to the main topic, discussing the mid-month convention for depreciating real property, differentiating it from mid-year and mid-quarter conventions used for personal property. Real property includes buildings and warehouses but not land. Two types of real property are covered: residential rental property (with a class life of 27.5 years) and non-residential property (with a class life of 39 years), both using the straight-line method of depreciation with the mid-month convention. Residential rental properties are defined as those where 80% of the gross rental income comes from non-transient dwellings.
00:03:00
In this segment of the video, the speaker discusses the differences between residential rental property and non-residential properties such as hotels and motels, specifying that the latter are not considered residential rental properties. The concept of the mid-month convention is explained, which means that any property put into use at any time during the month is treated as if it was put into use on the 15th of that month. For residential rental property, depreciation is calculated over 27.5 years using the straight-line method, with the first year being prorated. Similarly, for non-residential commercial property, the depreciation period is 39 years, also using the straight-line method, with prorated calculations for the first and last years. The speaker illustrates that the sum of depreciation rates for the prorated first year and the last year should add up to approximately 2.564.
00:06:00
In this segment of the video, the speaker explains how depreciation is prorated over the life of a residential rental property and a commercial property. They use an example where John purchases residential real estate for a million dollars on April 1, 2005. Since it’s residential rental real estate, it follows a 27.5-year straight-line depreciation with the mid-month convention. The annual cost recovery deduction from year two onwards is calculated at 3.636%, amounting to $36,360. If the property is sold in October, the deduction for that year would be prorated to $28,782, taking nine and a half months into account.
For a commercial property, the example changes to a purchase on November 2, 2022. Here, the property follows a 39-year straight-line depreciation. Given the November purchase, the prorated annual deduction rate for the partial year is 0.3210%, computed as a portion of the year based on the mid-month convention.
00:09:00
In this part of the video, the speaker discusses the deduction rate transition from year two to year 39, which will be 2.564 percent. They explain how to calculate the depreciation when an asset is sold in May, using the mid-month convention. The calculation involves taking the full yearly depreciation and then prorating it for the 4.5 months the asset was held. An example calculation arrives at $9,615. The speaker advises viewers to access additional resources, like lectures and notes, to better understand the cost recovery methods, including the mid-month convention for real property. They encourage diligent study for CPA candidates, enrolled agents, and accounting students.