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H&r block online Publication 972 - Introductory Material Table of Contents Future Developments Reminder IntroductionOrdering forms and publications. H&r block online Tax questions. H&r block online Future Developments For the latest information about developments related to Publication 972, such as legislation enacted after it was published, go to www. H&r block online irs. H&r block online gov/pub972. H&r block online Reminder Photographs of missing children. H&r block online  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. H&r block online Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. H&r block online You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. H&r block online Introduction The purpose of this publication is: To figure the child tax credit you claim on Form 1040, line 51; Form 1040A, line 33; or Form 1040NR, line 48; and To figure the amount of earned income you enter on line 4a of Schedule 8812 (Form 1040A or 1040), Child Tax Credit. H&r block online This publication is intended primarily for individuals sent here by the instructions to Forms 1040, 1040A, or 1040NR, or Schedule 8812. H&r block online Even if you were not sent here by the instructions to one of the forms or the schedule, you can still choose to use this publication to figure your credit. H&r block online However, most individuals can use a simpler worksheet in their tax form instructions. H&r block online If you were sent here from your Form 1040, Form 1040A, or Form 1040NR instructions. H&r block online   Complete the Child Tax Credit Worksheet , later in this publication. H&r block online If you were sent here from your Schedule 8812 instructions. H&r block online   Complete the 1040 and 1040NR Filers — Earned Income Worksheet , later in this publication. H&r block online If you have not read your Form 1040, Form 1040A, or Form 1040NR instructions. H&r block online   Read the explanation of who must use this publication next. H&r block online If you find that you are not required to use this publication to figure your child tax credit, you can use the simpler worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions to figure your credit. H&r block online Who must use this publication. H&r block online   If you answer “Yes” to either of the following questions, you must use this publication to figure your child tax credit. H&r block online Are you excluding income from Puerto Rico or filing any of the following forms? Form 2555 or 2555-EZ (relating to foreign earned income). H&r block online Form 4563 (exclusion of income for residents of American Samoa). H&r block online Are you claiming any of the following credits? Mortgage interest credit, Form 8396. H&r block online Adoption credit, Form 8839. H&r block online Residential energy efficient property credit, Form 5695, Part I. H&r block online District of Columbia first-time homebuyer credit, Form 8859. H&r block online Comments and suggestions. H&r block online   We welcome your comments about this publication and your suggestions for future editions. H&r block online   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. H&r block online NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. H&r block online Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. H&r block online   You can send your comments from www. H&r block online irs. H&r block online gov/formspubs/. H&r block online Click on “More Information” and then on “Comment on Tax Forms and Publications. H&r block online ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. H&r block online Ordering forms and publications. H&r block online   Visit www. H&r block online irs. H&r block online gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. H&r block online Internal Revenue Service 1201 N. H&r block online Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. H&r block online   If you have a tax question, check the information available on IRS. H&r block online gov or call 1-800-829-1040. H&r block online We cannot answer tax questions sent to either of the above addresses. H&r block online Prev  Up  Next   Home   More Online Publications
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H&r block online 2. H&r block online   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. H&r block online You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. H&r block online 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. H&r block online You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. H&r block online You can deduct depreciation only on the part of your property used for rental purposes. H&r block online Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. H&r block online You may have to use Form 4562 to figure and report your depreciation. H&r block online See Which Forms To Use in chapter 3. H&r block online Also see Publication 946. H&r block online Section 179 deduction. H&r block online   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. H&r block online This deduction is not allowed for property used in connection with residential rental property. H&r block online See chapter 2 of Publication 946. H&r block online Alternative minimum tax (AMT). H&r block online   If you use accelerated depreciation, you may be subject to the AMT. H&r block online 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). H&r block online   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. H&r block online However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). H&r block online   To find out if you are subject to the AMT, see the Instructions for Form 6251. H&r block online 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. H&r block online What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. H&r block online You own the property. H&r block online You use the property in your business or income-producing activity (such as rental property). H&r block online The property has a determinable useful life. H&r block online The property is expected to last more than one year. H&r block online Property you own. H&r block online   To claim depreciation, you usually must be the owner of the property. H&r block online You are considered as owning property even if it is subject to a debt. H&r block online Rented property. H&r block online   Generally, if you pay rent for property, you cannot depreciate that property. H&r block online Usually, only the owner can depreciate it. H&r block online However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. H&r block online See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. H&r block online Cooperative apartments. H&r block online   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. H&r block online See chapter 4, Special Situations. H&r block online Property having a determinable useful life. H&r block online   To be depreciable, your property must have a determinable useful life. H&r block online This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. H&r block online What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. H&r block online This includes land and certain excepted property. H&r block online Land. H&r block online   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. H&r block online But if it does, the loss is accounted for upon disposition. H&r block online The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. H&r block online   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. H&r block online 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. H&r block online Example. H&r block online You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. H&r block online Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. H&r block online If you replace the house, you would have to destroy the bushes and trees right next to it. H&r block online These bushes and trees are closely associated with the house, so they have a determinable useful life. H&r block online Therefore, you can depreciate them. H&r block online Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. H&r block online Excepted property. H&r block online   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. H&r block online Property placed in service and disposed of (or taken out of business use) in the same year. H&r block online Equipment used to build capital improvements. H&r block online You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. H&r block online For more information, see chapter 1 of Publication 946. H&r block online When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. H&r block online 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. H&r block online 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. H&r block online Even if you are not using the property, it is in service when it is ready and available for its specific use. H&r block online Example 1. H&r block online On November 22 of last year, you purchased a dishwasher for your rental property. H&r block online The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. H&r block online Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. H&r block online 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. H&r block online Example 2. H&r block online On April 6, you purchased a house to use as residential rental property. H&r block online You made extensive repairs to the house and had it ready for rent on July 5. H&r block online You began to advertise the house for rent in July and actually rented it beginning September 1. H&r block online The house is considered placed in service in July when it was ready and available for rent. H&r block online You can begin to depreciate the house in July. H&r block online Example 3. H&r block online You moved from your home in July. H&r block online During August and September you made several repairs to the house. H&r block online On October 1, you listed the property for rent with a real estate company, which rented it on December 1. H&r block online The property is considered placed in service on October 1, the date when it was available for rent. H&r block online Conversion to business use. H&r block online   If you place property in service in a personal activity, you cannot claim depreciation. H&r block online 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. H&r block online You place the property in service for business or income-producing use on the date of the change. H&r block online Example. H&r block online You bought a house and used it as your personal home several years before you converted it to rental property. H&r block online 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. H&r block online 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. H&r block online 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). H&r block online 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. H&r block online 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. H&r block online For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. H&r block online See Basis of Depreciable Property , later. H&r block online 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. H&r block online 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. H&r block online You sell or exchange the property. H&r block online You convert the property to personal use. H&r block online You abandon the property. H&r block online The property is destroyed. H&r block online Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. H&r block online If you placed rental property in service before 1987, you are using one of the following methods. H&r block online ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. H&r block online Straight line or declining balance method over the useful life of property placed in service before 1981. H&r block online See MACRS Depreciation , later, for more information. H&r block online Rental property placed in service before 2013. H&r block online   Continue to use the same method of figuring depreciation that you used in the past. H&r block online Use of real property changed. H&r block online   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. H&r block online This includes your residence that you changed to rental use. H&r block online See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. H&r block online Improvements made after 1986. H&r block online   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. H&r block online 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. H&r block online For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. H&r block online This publication discusses MACRS depreciation only. H&r block online If you need information about depreciating property placed in service before 1987, see Publication 534. H&r block online 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. H&r block online 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. H&r block online 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. H&r block online Basis and adjusted basis are explained in the following discussions. H&r block online 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. H&r block online See Basis of Property Changed to Rental Use in chapter 4. H&r block online Cost Basis The basis of property you buy is usually its cost. H&r block online The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. H&r block online 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. H&r block online Exception. H&r block online   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. H&r block online Such taxes were deductible before 1987 and after 2003. H&r block online Loans with low or no interest. H&r block online   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. H&r block online See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. H&r block online Real property. H&r block online   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. H&r block online Real estate taxes. H&r block online   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. H&r block online You cannot deduct them as taxes paid. H&r block online   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. H&r block online Do not include that amount in your basis in the property. H&r block online Settlement fees and other costs. H&r block online   The following settlement fees and closing costs for buying the property are part of your basis in the property. H&r block online Abstract fees. H&r block online Charges for installing utility services. H&r block online Legal fees. H&r block online Recording fees. H&r block online Surveys. H&r block online Transfer taxes. H&r block online Title insurance. H&r block online 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. H&r block online   The following are settlement fees and closing costs you cannot include in your basis in the property. H&r block online Fire insurance premiums. H&r block online Rent or other charges relating to occupancy of the property before closing. H&r block online 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. H&r block online   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. H&r block online Assumption of a mortgage. H&r block online   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. H&r block online Example. H&r block online You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. H&r block online Your basis is $300,000. H&r block online Separating cost of land and buildings. H&r block online   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. H&r block online 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. H&r block online   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. H&r block online Example. H&r block online You buy a house and land for $200,000. H&r block online The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. H&r block online 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. H&r block online 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. H&r block online 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). H&r block online 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. H&r block online If you received property in one of these ways, see Publication 551 for information on how to figure your basis. H&r block online 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. H&r block online The result of these adjustments to the basis is the adjusted basis. H&r block online Increases to basis. H&r block online   You must increase the basis of any property by the cost of all items properly added to a capital account. H&r block online These include the following. H&r block online 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. H&r block online Amounts spent after a casualty to restore the damaged property. H&r block online The cost of extending utility service lines to the property. H&r block online Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. H&r block online Additions or improvements. H&r block online   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. H&r block online This includes all direct costs, such as material and labor, but does not include your own labor. H&r block online It also includes all expenses related to the addition or improvement. H&r block online   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. H&r block online 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. H&r block online   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. H&r block online For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. H&r block online    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. H&r block online However, see What Rental Property Cannot Be Depreciated, earlier. H&r block online Assessments for local improvements. H&r block online   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. H&r block online 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. H&r block online Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. H&r block online You cannot deduct these items as taxes or depreciate them. H&r block online    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. H&r block online Do not add them to your basis in the property. H&r block online Deducting vs. H&r block online capitalizing costs. H&r block online   Do not add to your basis costs you can deduct as current expenses. H&r block online However, there are certain costs you can choose either to deduct or to capitalize. H&r block online If you capitalize these costs, include them in your basis. H&r block online If you deduct them, do not include them in your basis. H&r block online   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. H&r block online   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. H&r block online Decreases to basis. H&r block online   You must decrease the basis of your property by any items that represent a return of your cost. H&r block online These include the following. H&r block online Insurance or other payment you receive as the result of a casualty or theft loss. H&r block online Casualty loss not covered by insurance for which you took a deduction. H&r block online Amount(s) you receive for granting an easement. H&r block online 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. H&r block online Exclusion from income of subsidies for energy conservation measures. H&r block online Special depreciation allowance claimed on qualified property. H&r block online Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. H&r block online If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. H&r block online   If your rental property was previously used as your main home, you must also decrease the basis by the following. H&r block online Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. H&r block online District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. H&r block online Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. H&r block online Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. H&r block online This allowance is figured before you figure your regular depreciation deduction. H&r block online See Publication 946, chapter 3, for details. H&r block online Also see the Instructions for Form 4562, Line 14. H&r block online If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. H&r block online The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. H&r block online MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. H&r block online This section explains how to determine which MACRS depreciation system applies to your property. H&r block online It also discusses other information you need to know before you can figure depreciation under MACRS. H&r block online This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. H&r block online 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). H&r block online You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. H&r block online 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. H&r block online 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. H&r block online 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. H&r block online For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. H&r block online Electing ADS If you choose, you can use the ADS method for most property. H&r block online Under ADS, you use the straight line method of depreciation. H&r block online 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. H&r block online However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. H&r block online 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. H&r block online Once you make this election, you can never revoke it. H&r block online 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. H&r block online 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. H&r block online The property class generally determines the depreciation method, recovery period, and convention. H&r block online 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. H&r block online Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. H&r block online 5-year property. H&r block online This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. H&r block online ), automobiles, and light trucks. H&r block online This class also includes appliances, carpeting, furniture, etc. H&r block online , used in a residential rental real estate activity. H&r block online 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. H&r block online See chapter 5 of Publication 946. H&r block online 7-year property. H&r block online This class includes office furniture and equipment (desks, file cabinets, etc. H&r block online ). H&r block online 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. H&r block online 15-year property. H&r block online This class includes roads, fences, and shrubbery (if depreciable). H&r block online Residential rental property. H&r block online 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. H&r block online 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. H&r block online 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. H&r block online The other property classes do not generally apply to property used in rental activities. H&r block online These classes are not discussed in this publication. H&r block online See Publication 946 for more information. H&r block online Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. H&r block online The recovery periods are generally longer under ADS than GDS. H&r block online The recovery period of property depends on its property class. H&r block online Under GDS, the recovery period of an asset is generally the same as its property class. H&r block online Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. H&r block online See Table 2-1 for recovery periods of property commonly used in residential rental activities. H&r block online Qualified Indian reservation property. H&r block online   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. H&r block online For more information, see chapter 4 of Publication 946. H&r block online Additions or improvements to property. H&r block online   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. H&r block online   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. H&r block online   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. H&r block online Example. H&r block online You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. H&r block online You built an addition onto the house and placed it in service in 2013. H&r block online You must use MACRS for the addition. H&r block online Under GDS, the addition is depreciated as residential rental property over 27. H&r block online 5 years. H&r block online Table 2-1. H&r block online 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. H&r block online 27. H&r block online 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. H&r block online   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. H&r block online 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. H&r block online Mid-month convention. H&r block online    A mid-month convention is used for all residential rental property and nonresidential real property. H&r block online 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. H&r block online Mid-quarter convention. H&r block online   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. H&r block online   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. H&r block online Example. H&r block online During the tax year, Tom Martin purchased the following items to use in his rental property. H&r block online He elects not to claim the special depreciation allowance discussed earlier. H&r block online A dishwasher for $400 that he placed in service in January. H&r block online Used furniture for $100 that he placed in service in September. H&r block online A refrigerator for $800 that he placed in service in October. H&r block online Tom uses the calendar year as his tax year. H&r block online The total basis of all property placed in service that year is $1,300. H&r block online The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). H&r block online Tom must use the mid-quarter convention instead of the half-year convention for all three items. H&r block online Half-year convention. H&r block online    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. H&r block online 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. H&r block online   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. H&r block online You deduct a full year of depreciation for any other year during the recovery period. H&r block online Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. H&r block online The deduction is substantially the same both ways. H&r block online 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. H&r block online In this publication we will use the percentage tables. H&r block online For instructions on how to compute the deduction, see chapter 4 of Publication 946. H&r block online Residential rental property. H&r block online   You must use the straight line method and a mid-month convention for residential rental property. H&r block online 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). H&r block online 5-, 7-, or 15-year property. H&r block online   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. H&r block online However, in limited cases you must use the mid-quarter convention, if it applies. H&r block online For property in the 15-year class, use the 150% declining balance method and a half-year convention. H&r block online   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. H&r block online 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. H&r block online You make this election on Form 4562. H&r block online In Part III, column (f), enter “150 DB. H&r block online ” Once you make this election, you cannot change to another method. H&r block online   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. H&r block online   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. H&r block online 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. H&r block online You elect the straight line method on Form 4562. H&r block online In Part III, column (f), enter “S/L. H&r block online ” Once you make this election, you cannot change to another method. H&r block online MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. H&r block online The tables show the percentages for the first few years or until the change to the straight line method is made. H&r block online See Appendix A of Publication 946 for complete tables. H&r block online 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. H&r block online 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. H&r block online How to use the percentage tables. H&r block online   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. H&r block online   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. H&r block online   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. H&r block online 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 . H&r block online See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. H&r block online Unadjusted basis. H&r block online   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. H&r block online   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. H&r block online For more information, see chapter 4 of Publication 946. H&r block online Please click here for the text description of the image. H&r block online Table 2-2 Tables 2-2a, 2-2b, and 2-2c. H&r block online   The percentages in these tables take into account the half-year and mid-quarter conventions. H&r block online Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. H&r block online Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). H&r block online 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. H&r block online Example 1. H&r block online You purchased a stove and refrigerator and placed them in service in June. H&r block online Your basis in the stove is $600 and your basis in the refrigerator is $1,000. H&r block online Both are 5-year property. H&r block online Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. H&r block online For that year your depreciation deduction is $120 ($600 × . H&r block online 20) for the stove and $200 ($1,000 × . H&r block online 20) for the refrigerator. H&r block online For Year 2, the depreciation percentage is 32%. H&r block online That year's depreciation deduction will be $192 ($600 × . H&r block online 32) for the stove and $320 ($1,000 × . H&r block online 32) for the refrigerator. H&r block online Example 2. H&r block online Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. H&r block online 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 × . H&r block online 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. H&r block online 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%. H&r block online Your depreciation deduction for the refrigerator is $50 ($1,000 x . H&r block online 05). H&r block online 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%. H&r block online For that year, your depreciation deduction for the stove is $150 ($600 x . H&r block online 25). H&r block online Table 2-2d. H&r block online    Use this table when you are using the GDS 27. H&r block online 5 year option for residential rental property. H&r block online Find the row for the month that you placed the property in service. H&r block online Use the percentages listed for that month to figure your depreciation deduction. H&r block online The mid-month convention is taken into account in the percentages shown in the table. H&r block online Continue to use the same row (month) under the column for the appropriate year. H&r block online Example. H&r block online You purchased a single family rental house for $185,000 and placed it in service on February 8. H&r block online The sales contract showed that the building cost $160,000 and the land cost $25,000. H&r block online Your basis for depreciation is its original cost, $160,000. H&r block online 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. H&r block online 5 years. H&r block online Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. H&r block online 182%. H&r block online That year's depreciation deduction is $5,091 ($160,000 x . H&r block online 03182). H&r block online Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. H&r block online See Appendix B in Publication 946 for other property. H&r block online If your property is not listed in Appendix B, it is considered to have no class life. H&r block online Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. H&r block online Use the mid-month convention for residential rental property and nonresidential real property. H&r block online For all other property, use the half-year or mid-quarter convention, as appropriate. H&r block online See Publication 946 for ADS depreciation tables. H&r block online Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. H&r block online 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. H&r block online For more information, see Depreciation under Decreases to Basis in Publication 551. H&r block online 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. H&r block online S. H&r block online Individual Income Tax Return. H&r block online 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. H&r block online Filing an amended return. H&r block online   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. H&r block online You claimed the incorrect amount because of a mathematical error made in any year. H&r block online You claimed the incorrect amount because of a posting error made in any year. H&r block online You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. H&r block online You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. H&r block online   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. H&r block online 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. H&r block online   If an amended return is allowed, you must file it by the later of the following dates. H&r block online 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. H&r block online A return filed before an unextended due date is considered filed on that due date. H&r block online 2 years from the time you paid your tax for that year. H&r block online Changing your accounting method. H&r block online   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. H&r block online In some instances, that consent is automatic. H&r block online For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. H&r block online Prev  Up  Next   Home   More Online Publications