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1040x Software

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The 1040x Software

1040x software 2. 1040x software   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. 1040x software You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. 1040x software 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. 1040x software You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. 1040x software You can deduct depreciation only on the part of your property used for rental purposes. 1040x software Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. 1040x software You may have to use Form 4562 to figure and report your depreciation. 1040x software See Which Forms To Use in chapter 3. 1040x software Also see Publication 946. 1040x software Section 179 deduction. 1040x software   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. 1040x software This deduction is not allowed for property used in connection with residential rental property. 1040x software See chapter 2 of Publication 946. 1040x software Alternative minimum tax (AMT). 1040x software   If you use accelerated depreciation, you may be subject to the AMT. 1040x software 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). 1040x software   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. 1040x software However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). 1040x software   To find out if you are subject to the AMT, see the Instructions for Form 6251. 1040x software 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. 1040x software What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. 1040x software You own the property. 1040x software You use the property in your business or income-producing activity (such as rental property). 1040x software The property has a determinable useful life. 1040x software The property is expected to last more than one year. 1040x software Property you own. 1040x software   To claim depreciation, you usually must be the owner of the property. 1040x software You are considered as owning property even if it is subject to a debt. 1040x software Rented property. 1040x software   Generally, if you pay rent for property, you cannot depreciate that property. 1040x software Usually, only the owner can depreciate it. 1040x software However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. 1040x software See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. 1040x software Cooperative apartments. 1040x software   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. 1040x software See chapter 4, Special Situations. 1040x software Property having a determinable useful life. 1040x software   To be depreciable, your property must have a determinable useful life. 1040x software This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 1040x software What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. 1040x software This includes land and certain excepted property. 1040x software Land. 1040x software   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. 1040x software But if it does, the loss is accounted for upon disposition. 1040x software The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. 1040x software   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. 1040x software 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. 1040x software Example. 1040x software You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. 1040x software Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. 1040x software If you replace the house, you would have to destroy the bushes and trees right next to it. 1040x software These bushes and trees are closely associated with the house, so they have a determinable useful life. 1040x software Therefore, you can depreciate them. 1040x software Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. 1040x software Excepted property. 1040x software   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. 1040x software Property placed in service and disposed of (or taken out of business use) in the same year. 1040x software Equipment used to build capital improvements. 1040x software You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. 1040x software For more information, see chapter 1 of Publication 946. 1040x software When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. 1040x software 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. 1040x software 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. 1040x software Even if you are not using the property, it is in service when it is ready and available for its specific use. 1040x software Example 1. 1040x software On November 22 of last year, you purchased a dishwasher for your rental property. 1040x software The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. 1040x software Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. 1040x software 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. 1040x software Example 2. 1040x software On April 6, you purchased a house to use as residential rental property. 1040x software You made extensive repairs to the house and had it ready for rent on July 5. 1040x software You began to advertise the house for rent in July and actually rented it beginning September 1. 1040x software The house is considered placed in service in July when it was ready and available for rent. 1040x software You can begin to depreciate the house in July. 1040x software Example 3. 1040x software You moved from your home in July. 1040x software During August and September you made several repairs to the house. 1040x software On October 1, you listed the property for rent with a real estate company, which rented it on December 1. 1040x software The property is considered placed in service on October 1, the date when it was available for rent. 1040x software Conversion to business use. 1040x software   If you place property in service in a personal activity, you cannot claim depreciation. 1040x software 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. 1040x software You place the property in service for business or income-producing use on the date of the change. 1040x software Example. 1040x software You bought a house and used it as your personal home several years before you converted it to rental property. 1040x software 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. 1040x software 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. 1040x software 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). 1040x software 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. 1040x software 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. 1040x software For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. 1040x software See Basis of Depreciable Property , later. 1040x software 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. 1040x software 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. 1040x software You sell or exchange the property. 1040x software You convert the property to personal use. 1040x software You abandon the property. 1040x software The property is destroyed. 1040x software Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. 1040x software If you placed rental property in service before 1987, you are using one of the following methods. 1040x software ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. 1040x software Straight line or declining balance method over the useful life of property placed in service before 1981. 1040x software See MACRS Depreciation , later, for more information. 1040x software Rental property placed in service before 2013. 1040x software   Continue to use the same method of figuring depreciation that you used in the past. 1040x software Use of real property changed. 1040x software   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. 1040x software This includes your residence that you changed to rental use. 1040x software See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. 1040x software Improvements made after 1986. 1040x software   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. 1040x software 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. 1040x software For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. 1040x software This publication discusses MACRS depreciation only. 1040x software If you need information about depreciating property placed in service before 1987, see Publication 534. 1040x software 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. 1040x software 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. 1040x software 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. 1040x software Basis and adjusted basis are explained in the following discussions. 1040x software 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. 1040x software See Basis of Property Changed to Rental Use in chapter 4. 1040x software Cost Basis The basis of property you buy is usually its cost. 1040x software The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. 1040x software 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. 1040x software Exception. 1040x software   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. 1040x software Such taxes were deductible before 1987 and after 2003. 1040x software Loans with low or no interest. 1040x software   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. 1040x software See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. 1040x software Real property. 1040x software   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. 1040x software Real estate taxes. 1040x software   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. 1040x software You cannot deduct them as taxes paid. 1040x software   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. 1040x software Do not include that amount in your basis in the property. 1040x software Settlement fees and other costs. 1040x software   The following settlement fees and closing costs for buying the property are part of your basis in the property. 1040x software Abstract fees. 1040x software Charges for installing utility services. 1040x software Legal fees. 1040x software Recording fees. 1040x software Surveys. 1040x software Transfer taxes. 1040x software Title insurance. 1040x software 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. 1040x software   The following are settlement fees and closing costs you cannot include in your basis in the property. 1040x software Fire insurance premiums. 1040x software Rent or other charges relating to occupancy of the property before closing. 1040x software 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. 1040x software   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040x software Assumption of a mortgage. 1040x software   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. 1040x software Example. 1040x software You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. 1040x software Your basis is $300,000. 1040x software Separating cost of land and buildings. 1040x software   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. 1040x software 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. 1040x software   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. 1040x software Example. 1040x software You buy a house and land for $200,000. 1040x software The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. 1040x software 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. 1040x software 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. 1040x software 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). 1040x software 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. 1040x software If you received property in one of these ways, see Publication 551 for information on how to figure your basis. 1040x software 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. 1040x software The result of these adjustments to the basis is the adjusted basis. 1040x software Increases to basis. 1040x software   You must increase the basis of any property by the cost of all items properly added to a capital account. 1040x software These include the following. 1040x software 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. 1040x software Amounts spent after a casualty to restore the damaged property. 1040x software The cost of extending utility service lines to the property. 1040x software Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. 1040x software Additions or improvements. 1040x software   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. 1040x software This includes all direct costs, such as material and labor, but does not include your own labor. 1040x software It also includes all expenses related to the addition or improvement. 1040x software   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. 1040x software 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. 1040x software   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. 1040x software For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. 1040x software    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. 1040x software However, see What Rental Property Cannot Be Depreciated, earlier. 1040x software Assessments for local improvements. 1040x software   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. 1040x software 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. 1040x software Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. 1040x software You cannot deduct these items as taxes or depreciate them. 1040x software    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. 1040x software Do not add them to your basis in the property. 1040x software Deducting vs. 1040x software capitalizing costs. 1040x software   Do not add to your basis costs you can deduct as current expenses. 1040x software However, there are certain costs you can choose either to deduct or to capitalize. 1040x software If you capitalize these costs, include them in your basis. 1040x software If you deduct them, do not include them in your basis. 1040x software   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. 1040x software   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. 1040x software Decreases to basis. 1040x software   You must decrease the basis of your property by any items that represent a return of your cost. 1040x software These include the following. 1040x software Insurance or other payment you receive as the result of a casualty or theft loss. 1040x software Casualty loss not covered by insurance for which you took a deduction. 1040x software Amount(s) you receive for granting an easement. 1040x software 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. 1040x software Exclusion from income of subsidies for energy conservation measures. 1040x software Special depreciation allowance claimed on qualified property. 1040x software Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1040x software If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. 1040x software   If your rental property was previously used as your main home, you must also decrease the basis by the following. 1040x software Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. 1040x software District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. 1040x software Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. 1040x software Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. 1040x software This allowance is figured before you figure your regular depreciation deduction. 1040x software See Publication 946, chapter 3, for details. 1040x software Also see the Instructions for Form 4562, Line 14. 1040x software If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. 1040x software The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. 1040x software MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. 1040x software This section explains how to determine which MACRS depreciation system applies to your property. 1040x software It also discusses other information you need to know before you can figure depreciation under MACRS. 1040x software This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. 1040x software 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). 1040x software You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 1040x software 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. 1040x software 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. 1040x software 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. 1040x software For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. 1040x software Electing ADS If you choose, you can use the ADS method for most property. 1040x software Under ADS, you use the straight line method of depreciation. 1040x software 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. 1040x software However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. 1040x software 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. 1040x software Once you make this election, you can never revoke it. 1040x software 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. 1040x software 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. 1040x software The property class generally determines the depreciation method, recovery period, and convention. 1040x software 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. 1040x software Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. 1040x software 5-year property. 1040x software This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. 1040x software ), automobiles, and light trucks. 1040x software This class also includes appliances, carpeting, furniture, etc. 1040x software , used in a residential rental real estate activity. 1040x software 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. 1040x software See chapter 5 of Publication 946. 1040x software 7-year property. 1040x software This class includes office furniture and equipment (desks, file cabinets, etc. 1040x software ). 1040x software 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. 1040x software 15-year property. 1040x software This class includes roads, fences, and shrubbery (if depreciable). 1040x software Residential rental property. 1040x software 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. 1040x software 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. 1040x software 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. 1040x software The other property classes do not generally apply to property used in rental activities. 1040x software These classes are not discussed in this publication. 1040x software See Publication 946 for more information. 1040x software Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. 1040x software The recovery periods are generally longer under ADS than GDS. 1040x software The recovery period of property depends on its property class. 1040x software Under GDS, the recovery period of an asset is generally the same as its property class. 1040x software Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. 1040x software See Table 2-1 for recovery periods of property commonly used in residential rental activities. 1040x software Qualified Indian reservation property. 1040x software   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. 1040x software For more information, see chapter 4 of Publication 946. 1040x software Additions or improvements to property. 1040x software   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. 1040x software   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. 1040x software   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. 1040x software Example. 1040x software You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. 1040x software You built an addition onto the house and placed it in service in 2013. 1040x software You must use MACRS for the addition. 1040x software Under GDS, the addition is depreciated as residential rental property over 27. 1040x software 5 years. 1040x software Table 2-1. 1040x software 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. 1040x software 27. 1040x software 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. 1040x software   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. 1040x software 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. 1040x software Mid-month convention. 1040x software    A mid-month convention is used for all residential rental property and nonresidential real property. 1040x software 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. 1040x software Mid-quarter convention. 1040x software   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. 1040x software   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. 1040x software Example. 1040x software During the tax year, Tom Martin purchased the following items to use in his rental property. 1040x software He elects not to claim the special depreciation allowance discussed earlier. 1040x software A dishwasher for $400 that he placed in service in January. 1040x software Used furniture for $100 that he placed in service in September. 1040x software A refrigerator for $800 that he placed in service in October. 1040x software Tom uses the calendar year as his tax year. 1040x software The total basis of all property placed in service that year is $1,300. 1040x software The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). 1040x software Tom must use the mid-quarter convention instead of the half-year convention for all three items. 1040x software Half-year convention. 1040x software    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. 1040x software 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. 1040x software   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. 1040x software You deduct a full year of depreciation for any other year during the recovery period. 1040x software Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. 1040x software The deduction is substantially the same both ways. 1040x software 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. 1040x software In this publication we will use the percentage tables. 1040x software For instructions on how to compute the deduction, see chapter 4 of Publication 946. 1040x software Residential rental property. 1040x software   You must use the straight line method and a mid-month convention for residential rental property. 1040x software 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). 1040x software 5-, 7-, or 15-year property. 1040x software   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. 1040x software However, in limited cases you must use the mid-quarter convention, if it applies. 1040x software For property in the 15-year class, use the 150% declining balance method and a half-year convention. 1040x software   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. 1040x software 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. 1040x software You make this election on Form 4562. 1040x software In Part III, column (f), enter “150 DB. 1040x software ” Once you make this election, you cannot change to another method. 1040x software   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. 1040x software   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. 1040x software 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. 1040x software You elect the straight line method on Form 4562. 1040x software In Part III, column (f), enter “S/L. 1040x software ” Once you make this election, you cannot change to another method. 1040x software MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. 1040x software The tables show the percentages for the first few years or until the change to the straight line method is made. 1040x software See Appendix A of Publication 946 for complete tables. 1040x software 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. 1040x software 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. 1040x software How to use the percentage tables. 1040x software   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. 1040x software   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. 1040x software   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. 1040x software 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 . 1040x software See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. 1040x software Unadjusted basis. 1040x software   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. 1040x software   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. 1040x software For more information, see chapter 4 of Publication 946. 1040x software Please click here for the text description of the image. 1040x software Table 2-2 Tables 2-2a, 2-2b, and 2-2c. 1040x software   The percentages in these tables take into account the half-year and mid-quarter conventions. 1040x software Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. 1040x software Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). 1040x software 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. 1040x software Example 1. 1040x software You purchased a stove and refrigerator and placed them in service in June. 1040x software Your basis in the stove is $600 and your basis in the refrigerator is $1,000. 1040x software Both are 5-year property. 1040x software Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. 1040x software For that year your depreciation deduction is $120 ($600 × . 1040x software 20) for the stove and $200 ($1,000 × . 1040x software 20) for the refrigerator. 1040x software For Year 2, the depreciation percentage is 32%. 1040x software That year's depreciation deduction will be $192 ($600 × . 1040x software 32) for the stove and $320 ($1,000 × . 1040x software 32) for the refrigerator. 1040x software Example 2. 1040x software Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. 1040x software 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 × . 1040x software 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. 1040x software 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%. 1040x software Your depreciation deduction for the refrigerator is $50 ($1,000 x . 1040x software 05). 1040x software 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%. 1040x software For that year, your depreciation deduction for the stove is $150 ($600 x . 1040x software 25). 1040x software Table 2-2d. 1040x software    Use this table when you are using the GDS 27. 1040x software 5 year option for residential rental property. 1040x software Find the row for the month that you placed the property in service. 1040x software Use the percentages listed for that month to figure your depreciation deduction. 1040x software The mid-month convention is taken into account in the percentages shown in the table. 1040x software Continue to use the same row (month) under the column for the appropriate year. 1040x software Example. 1040x software You purchased a single family rental house for $185,000 and placed it in service on February 8. 1040x software The sales contract showed that the building cost $160,000 and the land cost $25,000. 1040x software Your basis for depreciation is its original cost, $160,000. 1040x software 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. 1040x software 5 years. 1040x software Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. 1040x software 182%. 1040x software That year's depreciation deduction is $5,091 ($160,000 x . 1040x software 03182). 1040x software Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. 1040x software See Appendix B in Publication 946 for other property. 1040x software If your property is not listed in Appendix B, it is considered to have no class life. 1040x software Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. 1040x software Use the mid-month convention for residential rental property and nonresidential real property. 1040x software For all other property, use the half-year or mid-quarter convention, as appropriate. 1040x software See Publication 946 for ADS depreciation tables. 1040x software Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. 1040x software 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. 1040x software For more information, see Depreciation under Decreases to Basis in Publication 551. 1040x software 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. 1040x software S. 1040x software Individual Income Tax Return. 1040x software 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. 1040x software Filing an amended return. 1040x software   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. 1040x software You claimed the incorrect amount because of a mathematical error made in any year. 1040x software You claimed the incorrect amount because of a posting error made in any year. 1040x software You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. 1040x software You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. 1040x software   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. 1040x software 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. 1040x software   If an amended return is allowed, you must file it by the later of the following dates. 1040x software 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 1040x software A return filed before an unextended due date is considered filed on that due date. 1040x software 2 years from the time you paid your tax for that year. 1040x software Changing your accounting method. 1040x software   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. 1040x software In some instances, that consent is automatic. 1040x software For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. 1040x software Prev  Up  Next   Home   More Online Publications