The correct statement is c. John must add the $72,500 to the original cost basis of the underlying property and retroactively re-calculate depreciation expense on that property from the original placed-in-service date.
Data and Calculations:
Cost of replacing warehouse roof = $60,000
Cost of demolishing and removing old roof = $12,500
The total replacement cost incurred = $72,500 ($60,000 + $12,500).
Answer Options:
a. John must deduct $72,500 unless he elects not to do so.
b. John may claim the $12,500 as a loss on a "partial disposition" unless he elects not to do so.
c. John must add the $72,500 to the original cost basis of the underlying property and retroactively re-calculate depreciation expense on that property from the original placed-in-service date.
d. John may elect to claim the $12,500 as a loss on a "partial disposition."
Thus, the correct statement about the costs incurred by John for the warehouse roof replacement is Option C because roof replacement costs are capitalized.
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