Hawaii Pre-Licensing National Practice Exam

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Prepare for the Hawaii Pre-Licensing National Exam. Study with flashcards and multiple choice questions, each question provides hints and explanations. Get ready for success!

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What method of depreciation must be used for properties purchased after 1979?

Double declining balance
Straight Line
Sum of the years' digits
Unit of production

The correct answer is: Straight Line

For properties purchased after 1979, the IRS requires the use of the straight-line method of depreciation for residential rental properties as well as for non-residential real property. The straight-line method spreads the cost of the asset evenly over its useful life, meaning that each year, the same amount of depreciation expense is recorded. This method is straightforward and easy to calculate, making it the most commonly used depreciation method in real estate. Using the straight-line method for real properties is advantageous as it simplifies accounting and tax reporting. Under current regulations, residential rental properties have a useful life of 27.5 years, while non-residential properties have a 39-year useful life. This means that property owners can deduct a portion of the property’s cost evenly over these designated periods, optimizing tax benefits. In contrast, the other methods listed are typically suited for more specialized circumstances or types of assets, but they are not applicable for real property under these specific regulations.