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The Back Tax

Back tax Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. Back tax Dispositions — mass asset accounts. Back tax Early dispositions — 15-year real property. Back tax Early dispositions — 18- and 19-year real property. Back tax Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. Back tax It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Back tax These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. Back tax If you placed property in service during this period, you must continue to figure your depreciation under ACRS. Back tax If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. Back tax Listed property includes cars, other means of transportation, and certain computers. Back tax Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. Back tax ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. Back tax It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Back tax ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. Back tax The alternate ACRS method used a recovery percentage based on a modified straight line method. Back tax The law prescribes fixed percentages to be uses for each class of property. Back tax Property depreciable under ACRS is called recovery property. Back tax The recovery class of property determines the recovery period. Back tax Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. Back tax Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. Back tax To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. Back tax You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. Back tax For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. Back tax What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. Back tax It includes new or used and real or personal property. Back tax The property must be for use in a trade or business or for the production of income. Back tax Property you acquired before 1981 or after 1986 is not ACRS recovery property. Back tax For information on depreciating property acquired before 1981, see chapter 2. Back tax For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. Back tax Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. Back tax It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. Back tax Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. Back tax Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. Back tax Intangible property. Back tax   Intangible property is not depreciated under ACRS. Back tax Property depreciated under methods not expressed in a term of years. Back tax   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. Back tax This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). Back tax Public utility property. Back tax   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. Back tax Additions or improvements to ACRS property after 1986. Back tax   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. Back tax ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. Back tax It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Back tax How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. Back tax Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. Back tax Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Back tax Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. Back tax However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. Back tax If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. Back tax If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. Back tax See Publication 551. Back tax Classes of Recovery Property All recovery property under ACRS is in one of the following classes. Back tax The class for your property was determined when you began to depreciate it. Back tax 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. Back tax Race horses over 2 years old when placed in service are 3-year property. Back tax Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. Back tax The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. Back tax You cannot claim depreciation for this property after 1988. Back tax 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. Back tax It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). Back tax The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. Back tax You cannot claim depreciation for this property after 1990. Back tax 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. Back tax Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. Back tax You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. Back tax For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. Back tax The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. Back tax Example. Back tax On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. Back tax You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. Back tax On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. Back tax The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Back tax Your ACRS deduction was $3,000 (8% × $37,500). Back tax In 1987, your ACRS deduction was $5,250 (14% × $37,500). Back tax In 1988, your ACRS deduction was $4,500 (12% × $37,500). Back tax In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). Back tax In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). Back tax 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. Back tax It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. Back tax Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. Back tax You could group 15-year real property by month and year placed in service. Back tax In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. Back tax You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. Back tax Example. Back tax On March 5, 1984, you placed an apartment building in service in your business. Back tax It is 15-year real property. Back tax After subtracting the value of the land, your unadjusted basis in the building is $250,000. Back tax You use the calendar year as your tax year. Back tax March is the third month of your tax year. Back tax Your ACRS deduction for 1984 was $25,000 (10% × $250,000). Back tax For 1985, the percentage for the third month of the second year of the recovery period is 11%. Back tax Your deduction was $27,500 (11% × $250,000). Back tax For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. Back tax For 1989 through 1992, the percentage for the third month is 6%. Back tax Your deduction each year is $15,000 (6% × $250,000). Back tax For 1993, 1994, and 1995, the percentage for the third month is 5%. Back tax Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. Back tax Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Back tax Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. Back tax Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. Back tax Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Back tax The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Back tax Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Back tax Use the percentages listed under that month for each year of the recovery period. Back tax Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Back tax Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. Back tax Example. Back tax In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. Back tax You use the calendar year as your tax year. Back tax You use Table C–3 because the property was placed in service after May 8, 1985. Back tax Your unadjusted basis for the property, not including the land, was $59,000. Back tax Your deduction for 1986 through 2001 is shown in the following table. Back tax Year Rate Deduction 1986 8. Back tax 9% $5,251 1987 12. Back tax 1% 7,139 1988 10. Back tax 5% 6,195 1989 9. Back tax 1% 5,369 1990 7. Back tax 9% 4,661 1991 6. Back tax 9% 4,071 1992 5. Back tax 9% 3,481 1993 5. Back tax 2% 3,068 1994 4. Back tax 6% 2,714 1995 4. Back tax 6% 2,714 1996 4. Back tax 6% 2,714 1997 4. Back tax 6% 2,714 1998 4. Back tax 6% 2,714 1999 4. Back tax 5% 2,655 2000 4. Back tax 5% 2,655 2001 1. Back tax 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. Back tax It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. Back tax The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. Back tax There are also tables for 18-year real property in the Appendix. Back tax Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. Back tax Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. Back tax Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. Back tax Use the percentages listed under that month for each year of the recovery period. Back tax Example. Back tax On April 28, 1985, you bought and placed in service a rental house. Back tax The house, not including the land, cost $95,000. Back tax This is your unadjusted basis for the house. Back tax You use the calendar year as your tax year. Back tax Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. Back tax You use Table 4 to figure your deduction for the house. Back tax April is the fourth month of your tax year. Back tax Your deduction for 1985 through 2003 is shown in the following table. Back tax Year Rate Deduction 1985 7. Back tax 0% $6,650 1986 9. Back tax 0% 8,550 1987 8. Back tax 0% 7,600 1988 7. Back tax 0% 6,650 1989 7. Back tax 0% 6,650 1990 6. Back tax 0% 5,700 1991 5. Back tax 0% 4,750 1992 5. Back tax 0% 4,750 1993 5. Back tax 0% 4,750 1994 5. Back tax 0% 4,750 1995 5. Back tax 0% 4,750 1996 5. Back tax 0% 4,750 1997 5. Back tax 0% 4,750 1998 4. Back tax 0% 3,800 1999 4. Back tax 0% 3,800 2000 4. Back tax 0% 3,800 2001 4. Back tax 0% 3,800 2002 4. Back tax 0% 3,800 2003 1. Back tax 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. Back tax It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. Back tax The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. Back tax Table 6 shows the percentages for 19-year real property. Back tax You find the month in your tax year that you placed the property in service. Back tax You use the percentages listed under that month for each year of the recovery period. Back tax Recovery Periods Each item of recovery property is assigned to a class of property. Back tax The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. Back tax The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. Back tax This alternate ACRS method uses a recovery percentage based on a modified straight line method. Back tax This alternate ACRS method generally uses percentages other than those from the tables. Back tax If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. Back tax This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. Back tax   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. Back tax 00% 10 years 10. Back tax 00% 12 years 8. Back tax 333% 15 years 6. Back tax 667% 25 years 4. Back tax 00% 35 years 2. Back tax 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. Back tax There are tables for 18- and 19-year real property later in this publication in the Appendix. Back tax For 15-year real property, see 15-year real property, later. Back tax 3-, 5-, and 10-year property. Back tax   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. Back tax This applies throughout the recovery period you selected. Back tax Half-year convention. Back tax   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. Back tax This applied regardless of when in the tax year you placed the property in service. Back tax For each of the remaining years in the recovery period, you take a full year's deduction. Back tax If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. Back tax Example. Back tax You operate a small upholstery business. Back tax On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. Back tax You elected to use the alternate ACRS method. Back tax You did not elect to take a section 179 deduction. Back tax You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. Back tax The saw is 5-year property, but you decided to recover its cost over 12 years. Back tax For 1986, your ACRS deduction reflected the half-year convention. Back tax In the first year, you deducted half of the amount determined for a full year. Back tax Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Back tax 00     Electric saw   12 years straight line = 8. Back tax 333% 8. Back tax 333% ÷ $500 = $41. Back tax 67 Half-year convention -½ of $41. Back tax 67= 20. Back tax 84 Total ACRS deduction for 1986 $1,320. Back tax 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Back tax Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. Back tax 333% 8. Back tax 333% ÷ $500 = $41. Back tax 67 Total annual ACRS deduction for 1987 through 1990 $2,641. Back tax 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. Back tax Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Back tax 00     Electric saw   12 years straight line = 8. Back tax 333% 8. Back tax 333% ÷ $500 = $41. Back tax 67 Total ACRS deduction for 1991 $1,341. Back tax 67       The truck is fully depreciated after 1991. Back tax You take a full year of depreciation for the saw for the years 1992 through 1997. Back tax Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. Back tax 333% 8. Back tax 333% ÷ $500 = $41. Back tax 67 Total annual ACRS deduction for 1992 through 1997 $41. Back tax 67       You take a half-year of depreciation for the saw for 1998. Back tax Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. Back tax 333% 8. Back tax 333% ÷ $500 = $41. Back tax 67 Half-year convention -½ of $41. Back tax 67= 20. Back tax 84 Total ACRS deduction for 1998 $20. Back tax 84       The saw is fully depreciated after 1998. Back tax 15-year real property. Back tax   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. Back tax The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. Back tax If you selected a 15-year recovery period, you use the percentage (6. Back tax 667%) from the schedule above. Back tax You prorate this percentage for the number of months the property was in service in the first year. Back tax If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. Back tax Alternate periods for 18-year real property. Back tax   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. Back tax The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. Back tax There are two tables for each alternate recovery period. Back tax One table shows the percentage for property placed in service after June 22, 1984. Back tax The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. Back tax Alternate periods for 19-year real property. Back tax   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. Back tax If you selected a 19-year recovery period, use Table 9 to determine your deduction. Back tax If you select a 35- or 45-year recovery period, use either Table 13 or 14. Back tax Example. Back tax You placed in service an apartment building on August 3, 1986. Back tax The building is 19-year real property. Back tax The sales contract allocated $300,000 to the building and $100,000 to the land. Back tax You use the calendar year as your tax year. Back tax You chose the alternate ACRS method over a recovery period of 35 years. Back tax For 1986, you figure your ACRS deduction usingTable 13. Back tax August is the eighth month of your tax year. Back tax The percentage from Table 13 for the eighth month is 1. Back tax 1%. Back tax Your deduction was $3,300 ($300,000 ÷ 1. Back tax 1%). Back tax The deduction rate from ACRS Table 13 for years 2 through 20 is 2. Back tax 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. Back tax 9%). Back tax Alternate periods for low-income housing. Back tax   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. Back tax If you selected a 15-year period for this property, use 6. Back tax 667% as the percentage. Back tax If you selected a 35- or 45-year period, use either Table 11, 12, or 15. Back tax Election. Back tax   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. Back tax Revocation of election. Back tax   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. Back tax The Commissioner grants consent only in extraordinary circumstances. Back tax Any request for a revocation will be considered a request for a ruling. Back tax ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. Back tax Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. Back tax You figure this by multiplying the unadjusted basis by the recovery percentage. Back tax You then multiply the ACRS deduction determined for a full tax year by a fraction. Back tax The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. Back tax For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. Back tax The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. Back tax The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. Back tax The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). Back tax You use the full ACRS percentages during the remaining years of the recovery period. Back tax For the first tax year after the recovery period, the unrecovered basis will be deductible. Back tax Exception. Back tax   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. Back tax You compute the number of months using either a full month or mid-month convention. Back tax This is true regardless of the number of months in the tax year and the recovery period and method used. Back tax Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. Back tax You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. Back tax You generally recognize gain or loss on the disposition of an asset by sale. Back tax However, nonrecognition rules can allow you to postpone some gain. Back tax See Publication 544. Back tax If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Back tax Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. Back tax Early dispositions. Back tax   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. Back tax When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. Back tax Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. Back tax   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. Back tax This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. Back tax Dispositions — mass asset accounts. Back tax   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. Back tax A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. Back tax Examples of mass assets include minor items of office, plant, and store furniture and fixtures. Back tax   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. Back tax You leave the unadjusted basis of the property in the account until recovered in future years. Back tax If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. Back tax Early dispositions — 15-year real property. Back tax   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Back tax You use a full-month convention. Back tax For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. Back tax This applies whether you use the regular ACRS method or elected the alternate ACRS method. Back tax Example. Back tax You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). Back tax You file your return based on a calendar year. Back tax Your rate from Table 1 for the third month is 10%. Back tax Your ACRS deduction for 1984 was $9,800 ($98. Back tax 000 ÷ 10%). Back tax For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. Back tax For 1989 through 1992, you figured your ACRS deductions using 6% for each year. Back tax The deduction each year was $98,000 ÷ 6%. Back tax For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. Back tax You sell the house on June 1, 1995. Back tax You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. Back tax The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). Back tax You then prorate this amount to the 5 months in 1995 during which it was rented. Back tax Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). Back tax Early dispositions — 18- and 19-year real property. Back tax   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Back tax For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. Back tax For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. Back tax Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. Back tax Count the month of disposition as half a month of use. Back tax Example. Back tax You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). Back tax You file your return based on a calendar year. Back tax Your rate from Table 4 for the seventh month is 4%. Back tax You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). Back tax In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. Back tax You sell the house on September 24, 1995. Back tax Figure your ACRS deduction for 1995 for the months of use. Back tax The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). Back tax Prorate this amount for the 8. Back tax 5 months in 1995 that you held the property. Back tax Under the mid-month convention, you count September as half a month. Back tax Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. Back tax 5/12). Back tax Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Back tax Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. Back tax This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. Back tax You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Back tax Section 1245 property generally includes all personal property. Back tax See Section 1245 property in chapter 4 of Publication 544 for more information. Back tax You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. Back tax You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Back tax Section 1250 property includes most real property. Back tax See Section 1250 property in chapter 4 of Publication 544 for more information. Back tax This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. Back tax Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. Back tax Any 15-, 18-, or 19-year real property that is subsidized low-income housing. Back tax For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. Back tax See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. Back tax Prev  Up  Next   Home   More Online Publications