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1040ez E-file

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1040ez E-file

1040ez e-file 2. 1040ez e-file   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. 1040ez e-file You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. 1040ez e-file Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. 1040ez e-file You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. 1040ez e-file You can deduct depreciation only on the part of your property used for rental purposes. 1040ez e-file Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. 1040ez e-file You may have to use Form 4562 to figure and report your depreciation. 1040ez e-file See Which Forms To Use in chapter 3. 1040ez e-file Also see Publication 946. 1040ez e-file Section 179 deduction. 1040ez e-file   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. 1040ez e-file This deduction is not allowed for property used in connection with residential rental property. 1040ez e-file See chapter 2 of Publication 946. 1040ez e-file Alternative minimum tax (AMT). 1040ez e-file   If you use accelerated depreciation, you may be subject to the AMT. 1040ez e-file Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). 1040ez e-file   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. 1040ez e-file However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). 1040ez e-file   To find out if you are subject to the AMT, see the Instructions for Form 6251. 1040ez e-file The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. 1040ez e-file What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. 1040ez e-file You own the property. 1040ez e-file You use the property in your business or income-producing activity (such as rental property). 1040ez e-file The property has a determinable useful life. 1040ez e-file The property is expected to last more than one year. 1040ez e-file Property you own. 1040ez e-file   To claim depreciation, you usually must be the owner of the property. 1040ez e-file You are considered as owning property even if it is subject to a debt. 1040ez e-file Rented property. 1040ez e-file   Generally, if you pay rent for property, you cannot depreciate that property. 1040ez e-file Usually, only the owner can depreciate it. 1040ez e-file However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. 1040ez e-file See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. 1040ez e-file Cooperative apartments. 1040ez e-file   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. 1040ez e-file See chapter 4, Special Situations. 1040ez e-file Property having a determinable useful life. 1040ez e-file   To be depreciable, your property must have a determinable useful life. 1040ez e-file This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 1040ez e-file What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. 1040ez e-file This includes land and certain excepted property. 1040ez e-file Land. 1040ez e-file   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. 1040ez e-file But if it does, the loss is accounted for upon disposition. 1040ez e-file The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. 1040ez e-file   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. 1040ez e-file These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. 1040ez e-file Example. 1040ez e-file You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. 1040ez e-file Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. 1040ez e-file If you replace the house, you would have to destroy the bushes and trees right next to it. 1040ez e-file These bushes and trees are closely associated with the house, so they have a determinable useful life. 1040ez e-file Therefore, you can depreciate them. 1040ez e-file Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. 1040ez e-file Excepted property. 1040ez e-file   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. 1040ez e-file Property placed in service and disposed of (or taken out of business use) in the same year. 1040ez e-file Equipment used to build capital improvements. 1040ez e-file You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. 1040ez e-file For more information, see chapter 1 of Publication 946. 1040ez e-file When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. 1040ez e-file You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. 1040ez e-file Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. 1040ez e-file Even if you are not using the property, it is in service when it is ready and available for its specific use. 1040ez e-file Example 1. 1040ez e-file On November 22 of last year, you purchased a dishwasher for your rental property. 1040ez e-file The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. 1040ez e-file Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. 1040ez e-file If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. 1040ez e-file Example 2. 1040ez e-file On April 6, you purchased a house to use as residential rental property. 1040ez e-file You made extensive repairs to the house and had it ready for rent on July 5. 1040ez e-file You began to advertise the house for rent in July and actually rented it beginning September 1. 1040ez e-file The house is considered placed in service in July when it was ready and available for rent. 1040ez e-file You can begin to depreciate the house in July. 1040ez e-file Example 3. 1040ez e-file You moved from your home in July. 1040ez e-file During August and September you made several repairs to the house. 1040ez e-file On October 1, you listed the property for rent with a real estate company, which rented it on December 1. 1040ez e-file The property is considered placed in service on October 1, the date when it was available for rent. 1040ez e-file Conversion to business use. 1040ez e-file   If you place property in service in a personal activity, you cannot claim depreciation. 1040ez e-file However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. 1040ez e-file You place the property in service for business or income-producing use on the date of the change. 1040ez e-file Example. 1040ez e-file You bought a house and used it as your personal home several years before you converted it to rental property. 1040ez e-file Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. 1040ez e-file You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. 1040ez e-file Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). 1040ez e-file For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. 1040ez e-file Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. 1040ez e-file For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. 1040ez e-file See Basis of Depreciable Property , later. 1040ez e-file Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. 1040ez e-file You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. 1040ez e-file You sell or exchange the property. 1040ez e-file You convert the property to personal use. 1040ez e-file You abandon the property. 1040ez e-file The property is destroyed. 1040ez e-file Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. 1040ez e-file If you placed rental property in service before 1987, you are using one of the following methods. 1040ez e-file ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. 1040ez e-file Straight line or declining balance method over the useful life of property placed in service before 1981. 1040ez e-file See MACRS Depreciation , later, for more information. 1040ez e-file Rental property placed in service before 2013. 1040ez e-file   Continue to use the same method of figuring depreciation that you used in the past. 1040ez e-file Use of real property changed. 1040ez e-file   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. 1040ez e-file This includes your residence that you changed to rental use. 1040ez e-file See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. 1040ez e-file Improvements made after 1986. 1040ez e-file   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. 1040ez e-file As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. 1040ez e-file For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. 1040ez e-file This publication discusses MACRS depreciation only. 1040ez e-file If you need information about depreciating property placed in service before 1987, see Publication 534. 1040ez e-file Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. 1040ez e-file This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. 1040ez e-file If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. 1040ez e-file Basis and adjusted basis are explained in the following discussions. 1040ez e-file If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. 1040ez e-file See Basis of Property Changed to Rental Use in chapter 4. 1040ez e-file Cost Basis The basis of property you buy is usually its cost. 1040ez e-file The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. 1040ez e-file Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. 1040ez e-file Exception. 1040ez e-file   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. 1040ez e-file Such taxes were deductible before 1987 and after 2003. 1040ez e-file Loans with low or no interest. 1040ez e-file   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. 1040ez e-file See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. 1040ez e-file Real property. 1040ez e-file   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. 1040ez e-file Real estate taxes. 1040ez e-file   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. 1040ez e-file You cannot deduct them as taxes paid. 1040ez e-file   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. 1040ez e-file Do not include that amount in your basis in the property. 1040ez e-file Settlement fees and other costs. 1040ez e-file   The following settlement fees and closing costs for buying the property are part of your basis in the property. 1040ez e-file Abstract fees. 1040ez e-file Charges for installing utility services. 1040ez e-file Legal fees. 1040ez e-file Recording fees. 1040ez e-file Surveys. 1040ez e-file Transfer taxes. 1040ez e-file Title insurance. 1040ez e-file Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 1040ez e-file   The following are settlement fees and closing costs you cannot include in your basis in the property. 1040ez e-file Fire insurance premiums. 1040ez e-file Rent or other charges relating to occupancy of the property before closing. 1040ez e-file Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. 1040ez e-file   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040ez e-file Assumption of a mortgage. 1040ez e-file   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. 1040ez e-file Example. 1040ez e-file You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. 1040ez e-file Your basis is $300,000. 1040ez e-file Separating cost of land and buildings. 1040ez e-file   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. 1040ez e-file The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. 1040ez e-file   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. 1040ez e-file Example. 1040ez e-file You buy a house and land for $200,000. 1040ez e-file The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. 1040ez e-file The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. 1040ez e-file You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. 1040ez e-file Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). 1040ez e-file Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. 1040ez e-file If you received property in one of these ways, see Publication 551 for information on how to figure your basis. 1040ez e-file Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. 1040ez e-file The result of these adjustments to the basis is the adjusted basis. 1040ez e-file Increases to basis. 1040ez e-file   You must increase the basis of any property by the cost of all items properly added to a capital account. 1040ez e-file These include the following. 1040ez e-file The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. 1040ez e-file Amounts spent after a casualty to restore the damaged property. 1040ez e-file The cost of extending utility service lines to the property. 1040ez e-file Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. 1040ez e-file Additions or improvements. 1040ez e-file   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. 1040ez e-file This includes all direct costs, such as material and labor, but does not include your own labor. 1040ez e-file It also includes all expenses related to the addition or improvement. 1040ez e-file   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. 1040ez e-file Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. 1040ez e-file   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. 1040ez e-file For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. 1040ez e-file    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. 1040ez e-file However, see What Rental Property Cannot Be Depreciated, earlier. 1040ez e-file Assessments for local improvements. 1040ez e-file   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. 1040ez e-file For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. 1040ez e-file Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. 1040ez e-file You cannot deduct these items as taxes or depreciate them. 1040ez e-file    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. 1040ez e-file Do not add them to your basis in the property. 1040ez e-file Deducting vs. 1040ez e-file capitalizing costs. 1040ez e-file   Do not add to your basis costs you can deduct as current expenses. 1040ez e-file However, there are certain costs you can choose either to deduct or to capitalize. 1040ez e-file If you capitalize these costs, include them in your basis. 1040ez e-file If you deduct them, do not include them in your basis. 1040ez e-file   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. 1040ez e-file   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. 1040ez e-file Decreases to basis. 1040ez e-file   You must decrease the basis of your property by any items that represent a return of your cost. 1040ez e-file These include the following. 1040ez e-file Insurance or other payment you receive as the result of a casualty or theft loss. 1040ez e-file Casualty loss not covered by insurance for which you took a deduction. 1040ez e-file Amount(s) you receive for granting an easement. 1040ez e-file Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. 1040ez e-file Exclusion from income of subsidies for energy conservation measures. 1040ez e-file Special depreciation allowance claimed on qualified property. 1040ez e-file Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1040ez e-file If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. 1040ez e-file   If your rental property was previously used as your main home, you must also decrease the basis by the following. 1040ez e-file Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. 1040ez e-file District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. 1040ez e-file Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. 1040ez e-file Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. 1040ez e-file This allowance is figured before you figure your regular depreciation deduction. 1040ez e-file See Publication 946, chapter 3, for details. 1040ez e-file Also see the Instructions for Form 4562, Line 14. 1040ez e-file If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. 1040ez e-file The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. 1040ez e-file MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. 1040ez e-file This section explains how to determine which MACRS depreciation system applies to your property. 1040ez e-file It also discusses other information you need to know before you can figure depreciation under MACRS. 1040ez e-file This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. 1040ez e-file Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). 1040ez e-file You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 1040ez e-file Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. 1040ez e-file In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. 1040ez e-file However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. 1040ez e-file For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. 1040ez e-file Electing ADS If you choose, you can use the ADS method for most property. 1040ez e-file Under ADS, you use the straight line method of depreciation. 1040ez e-file The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. 1040ez e-file However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. 1040ez e-file If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. 1040ez e-file Once you make this election, you can never revoke it. 1040ez e-file For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. 1040ez e-file Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. 1040ez e-file The property class generally determines the depreciation method, recovery period, and convention. 1040ez e-file The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. 1040ez e-file Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. 1040ez e-file 5-year property. 1040ez e-file This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. 1040ez e-file ), automobiles, and light trucks. 1040ez e-file This class also includes appliances, carpeting, furniture, etc. 1040ez e-file , used in a residential rental real estate activity. 1040ez e-file Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. 1040ez e-file See chapter 5 of Publication 946. 1040ez e-file 7-year property. 1040ez e-file This class includes office furniture and equipment (desks, file cabinets, etc. 1040ez e-file ). 1040ez e-file This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. 1040ez e-file 15-year property. 1040ez e-file This class includes roads, fences, and shrubbery (if depreciable). 1040ez e-file Residential rental property. 1040ez e-file This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. 1040ez e-file It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. 1040ez e-file If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. 1040ez e-file The other property classes do not generally apply to property used in rental activities. 1040ez e-file These classes are not discussed in this publication. 1040ez e-file See Publication 946 for more information. 1040ez e-file Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. 1040ez e-file The recovery periods are generally longer under ADS than GDS. 1040ez e-file The recovery period of property depends on its property class. 1040ez e-file Under GDS, the recovery period of an asset is generally the same as its property class. 1040ez e-file Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. 1040ez e-file See Table 2-1 for recovery periods of property commonly used in residential rental activities. 1040ez e-file Qualified Indian reservation property. 1040ez e-file   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. 1040ez e-file For more information, see chapter 4 of Publication 946. 1040ez e-file Additions or improvements to property. 1040ez e-file   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. 1040ez e-file   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. 1040ez e-file   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. 1040ez e-file Example. 1040ez e-file You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. 1040ez e-file You built an addition onto the house and placed it in service in 2013. 1040ez e-file You must use MACRS for the addition. 1040ez e-file Under GDS, the addition is depreciated as residential rental property over 27. 1040ez e-file 5 years. 1040ez e-file Table 2-1. 1040ez e-file MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. 1040ez e-file 27. 1040ez e-file 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. 1040ez e-file   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. 1040ez e-file The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. 1040ez e-file Mid-month convention. 1040ez e-file    A mid-month convention is used for all residential rental property and nonresidential real property. 1040ez e-file Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. 1040ez e-file Mid-quarter convention. 1040ez e-file   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. 1040ez e-file   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. 1040ez e-file Example. 1040ez e-file During the tax year, Tom Martin purchased the following items to use in his rental property. 1040ez e-file He elects not to claim the special depreciation allowance discussed earlier. 1040ez e-file A dishwasher for $400 that he placed in service in January. 1040ez e-file Used furniture for $100 that he placed in service in September. 1040ez e-file A refrigerator for $800 that he placed in service in October. 1040ez e-file Tom uses the calendar year as his tax year. 1040ez e-file The total basis of all property placed in service that year is $1,300. 1040ez e-file The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). 1040ez e-file Tom must use the mid-quarter convention instead of the half-year convention for all three items. 1040ez e-file Half-year convention. 1040ez e-file    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. 1040ez e-file Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year. 1040ez e-file   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. 1040ez e-file You deduct a full year of depreciation for any other year during the recovery period. 1040ez e-file Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. 1040ez e-file The deduction is substantially the same both ways. 1040ez e-file You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. 1040ez e-file In this publication we will use the percentage tables. 1040ez e-file For instructions on how to compute the deduction, see chapter 4 of Publication 946. 1040ez e-file Residential rental property. 1040ez e-file   You must use the straight line method and a mid-month convention for residential rental property. 1040ez e-file In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). 1040ez e-file 5-, 7-, or 15-year property. 1040ez e-file   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. 1040ez e-file However, in limited cases you must use the mid-quarter convention, if it applies. 1040ez e-file For property in the 15-year class, use the 150% declining balance method and a half-year convention. 1040ez e-file   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. 1040ez e-file The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. 1040ez e-file You make this election on Form 4562. 1040ez e-file In Part III, column (f), enter “150 DB. 1040ez e-file ” Once you make this election, you cannot change to another method. 1040ez e-file   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. 1040ez e-file   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. 1040ez e-file The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. 1040ez e-file You elect the straight line method on Form 4562. 1040ez e-file In Part III, column (f), enter “S/L. 1040ez e-file ” Once you make this election, you cannot change to another method. 1040ez e-file MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. 1040ez e-file The tables show the percentages for the first few years or until the change to the straight line method is made. 1040ez e-file See Appendix A of Publication 946 for complete tables. 1040ez e-file The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. 1040ez e-file If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. 1040ez e-file How to use the percentage tables. 1040ez e-file   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. 1040ez e-file   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. 1040ez e-file   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. 1040ez e-file For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . 1040ez e-file See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. 1040ez e-file Unadjusted basis. 1040ez e-file   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. 1040ez e-file   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. 1040ez e-file For more information, see chapter 4 of Publication 946. 1040ez e-file Please click here for the text description of the image. 1040ez e-file Table 2-2 Tables 2-2a, 2-2b, and 2-2c. 1040ez e-file   The percentages in these tables take into account the half-year and mid-quarter conventions. 1040ez e-file Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. 1040ez e-file Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). 1040ez e-file If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. 1040ez e-file Example 1. 1040ez e-file You purchased a stove and refrigerator and placed them in service in June. 1040ez e-file Your basis in the stove is $600 and your basis in the refrigerator is $1,000. 1040ez e-file Both are 5-year property. 1040ez e-file Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. 1040ez e-file For that year your depreciation deduction is $120 ($600 × . 1040ez e-file 20) for the stove and $200 ($1,000 × . 1040ez e-file 20) for the refrigerator. 1040ez e-file For Year 2, the depreciation percentage is 32%. 1040ez e-file That year's depreciation deduction will be $192 ($600 × . 1040ez e-file 32) for the stove and $320 ($1,000 × . 1040ez e-file 32) for the refrigerator. 1040ez e-file Example 2. 1040ez e-file Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. 1040ez e-file Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . 1040ez e-file 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. 1040ez e-file Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. 1040ez e-file Your depreciation deduction for the refrigerator is $50 ($1,000 x . 1040ez e-file 05). 1040ez e-file Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. 1040ez e-file For that year, your depreciation deduction for the stove is $150 ($600 x . 1040ez e-file 25). 1040ez e-file Table 2-2d. 1040ez e-file    Use this table when you are using the GDS 27. 1040ez e-file 5 year option for residential rental property. 1040ez e-file Find the row for the month that you placed the property in service. 1040ez e-file Use the percentages listed for that month to figure your depreciation deduction. 1040ez e-file The mid-month convention is taken into account in the percentages shown in the table. 1040ez e-file Continue to use the same row (month) under the column for the appropriate year. 1040ez e-file Example. 1040ez e-file You purchased a single family rental house for $185,000 and placed it in service on February 8. 1040ez e-file The sales contract showed that the building cost $160,000 and the land cost $25,000. 1040ez e-file Your basis for depreciation is its original cost, $160,000. 1040ez e-file This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. 1040ez e-file 5 years. 1040ez e-file Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. 1040ez e-file 182%. 1040ez e-file That year's depreciation deduction is $5,091 ($160,000 x . 1040ez e-file 03182). 1040ez e-file Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. 1040ez e-file See Appendix B in Publication 946 for other property. 1040ez e-file If your property is not listed in Appendix B, it is considered to have no class life. 1040ez e-file Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. 1040ez e-file Use the mid-month convention for residential rental property and nonresidential real property. 1040ez e-file For all other property, use the half-year or mid-quarter convention, as appropriate. 1040ez e-file See Publication 946 for ADS depreciation tables. 1040ez e-file Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. 1040ez e-file If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. 1040ez e-file For more information, see Depreciation under Decreases to Basis in Publication 551. 1040ez e-file If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. 1040ez e-file S. 1040ez e-file Individual Income Tax Return. 1040ez e-file If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. 1040ez e-file Filing an amended return. 1040ez e-file   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. 1040ez e-file You claimed the incorrect amount because of a mathematical error made in any year. 1040ez e-file You claimed the incorrect amount because of a posting error made in any year. 1040ez e-file You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. 1040ez e-file You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. 1040ez e-file   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. 1040ez e-file This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. 1040ez e-file   If an amended return is allowed, you must file it by the later of the following dates. 1040ez e-file 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 1040ez e-file A return filed before an unextended due date is considered filed on that due date. 1040ez e-file 2 years from the time you paid your tax for that year. 1040ez e-file Changing your accounting method. 1040ez e-file   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. 1040ez e-file In some instances, that consent is automatic. 1040ez e-file For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. 1040ez e-file Prev  Up  Next   Home   More Online Publications
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BusinessUSA Resource Access API
BusinessUSA connects businesses to government services and information. The API provides access to resource abstracts including programs, services, data, events, and more.
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Go.USA.gov API
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Social Media Registry API
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The 1040ez E-file

1040ez e-file 10. 1040ez e-file   Retirement Savings Contributions Credit (Saver's Credit) Table of Contents Full-time student. 1040ez e-file Adjusted gross income. 1040ez e-file Distributions received by spouse. 1040ez e-file Testing period. 1040ez e-file If you or your employer make eligible contributions (defined later) to a retirement plan, you may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). 1040ez e-file This credit could reduce the federal income tax you pay dollar for dollar. 1040ez e-file Can you claim the credit?   If you or your employer make eligible contributions to a retirement plan, you can claim the credit if all of the following apply. 1040ez e-file You are not under age 18. 1040ez e-file You are not a full-time student (explained next). 1040ez e-file No one else, such as your parent(s), claims an exemption for you on their tax return. 1040ez e-file Your adjusted gross income (defined later) is not more than: $59,000 for 2013 ($60,000 for 2014) if your filing status is married filing jointly, $44,250 for 2013 ($45,000 for 2014) if your filing status is head of household (with qualifying person), or $29,500 for 2013 ($30,000 for 2014) if your filing status is single, married filing separately, or qualifying widow(er) with dependent child. 1040ez e-file Full-time student. 1040ez e-file   You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government. 1040ez e-file You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full-time. 1040ez e-file Adjusted gross income. 1040ez e-file   This is generally the amount on line 38 of your 2013 Form 1040 or line 22 of your 2013 Form 1040A. 1040ez e-file However, you must add to that amount any exclusion or deduction claimed for the year for: Foreign earned income, Foreign housing costs, Income for bona fide residents of American Samoa, and Income from Puerto Rico. 1040ez e-file Eligible contributions. 1040ez e-file   These include: Contributions to a traditional or Roth IRA, Elective deferrals, including amounts designated as after-tax Roth contributions, to: A 401(k) plan (including a SIMPLE 401(k)), A section 403(b) annuity, An eligible deferred compensation plan of a state or local government (a governmental 457 plan), A SIMPLE IRA plan, or A salary reduction SEP, and Contributions to a section 501(c)(18) plan. 1040ez e-file They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or a section 403(b) annuity. 1040ez e-file For purposes of the credit, an employee contribution will be voluntary as long as it is not required as a condition of employment. 1040ez e-file Reducing eligible contributions. 1040ez e-file   Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included earlier under Eligible contributions. 1040ez e-file Also reduce your eligible contributions by any distribution from a Roth IRA that is not rolled over, even if the distribution is not taxable. 1040ez e-file      Do not reduce your eligible contributions by any of the following: The portion of any distribution which is not includible in income because it is a trustee-to-trustee transfer or a rollover distribution. 1040ez e-file Any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if: The distribution is made before the due date (including extensions) of your tax return for that year, You do not take a deduction for the contribution, and The distribution includes any income attributable to the contribution. 1040ez e-file Loans from a qualified employer plan treated as a distribution. 1040ez e-file Distributions of excess contributions or deferrals (and income attributable to excess contributions and deferrals). 1040ez e-file Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k). 1040ez e-file Distributions from an eligible retirement plan that are converted or rolled over to a Roth IRA. 1040ez e-file Distributions from a military retirement plan. 1040ez e-file Distributions received by spouse. 1040ez e-file   Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit. 1040ez e-file Testing period. 1040ez e-file   The testing period consists of: The year in which you claim the credit, The 2 years before the year in which you claim the credit, and The period after the end of the year in which you claim the credit and before the due date of the return (including extensions) for filing your return for the year in which you claimed the credit. 1040ez e-file Example. 1040ez e-file You and your spouse filed joint returns in 2011 and 2012, and plan to do so in 2013 and 2014. 1040ez e-file You received a taxable distribution from a qualified plan in 2011 and a taxable distribution from an eligible section 457(b) deferred compensation plan in 2012. 1040ez e-file Your spouse received taxable distributions from a Roth IRA in 2013 and tax-free distributions from a Roth IRA in 2014 before April 15. 1040ez e-file You made eligible contributions to an IRA in 2013 and you otherwise qualify for this credit. 1040ez e-file You must reduce the amount of your qualifying contributions in 2013 by the total of the distributions you and your spouse received in 2011, 2012, 2013, and 2014. 1040ez e-file Maximum eligible contributions. 1040ez e-file   After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person. 1040ez e-file Effect on other credits. 1040ez e-file   The amount of this credit will not change the amount of your refundable tax credits. 1040ez e-file A refundable tax credit, such as the earned income credit or the additional child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes. 1040ez e-file Maximum credit. 1040ez e-file   This is a nonrefundable credit. 1040ez e-file The amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. 1040ez e-file If your tax liability is reduced to zero because of other nonrefundable credits, such as the education credits, then you will not be entitled to this credit. 1040ez e-file How to figure and report the credit. 1040ez e-file   The amount of the credit you can get is based on the contributions you make and your credit rate. 1040ez e-file The credit rate can be as low as 10% or as high as 50%. 1040ez e-file Your credit rate depends on your income and your filing status. 1040ez e-file See Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your credit rate. 1040ez e-file   The maximum contribution taken into account is $2,000 per person. 1040ez e-file On a joint return, up to $2,000 is taken into account for each spouse. 1040ez e-file   Figure the credit on Form 8880. 1040ez e-file Report the credit on line 50 of your Form 1040 or line 32 of your Form 1040A, and attach Form 8880 to your return. 1040ez e-file Prev  Up  Next   Home   More Online Publications