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Nonresidents State Tax Forms

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Nonresidents State Tax Forms

Nonresidents state tax forms 3. Nonresidents state tax forms   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). Nonresidents state tax forms There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. Nonresidents state tax forms There are also the limitations which may need to be applied if you have a net loss on Schedule E. Nonresidents state tax forms There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. Nonresidents state tax forms You may also have a gain or loss related to your rental property from a casualty or theft. Nonresidents state tax forms This is considered separately from the income and expense information you report on Schedule E. Nonresidents state tax forms Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Nonresidents state tax forms However, do not use that schedule to report a not-for-profit activity. Nonresidents state tax forms See Not Rented for Profit , in chapter 4. Nonresidents state tax forms There are also other rental situations in which forms other than Schedule E would be used. Nonresidents state tax forms Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Nonresidents state tax forms , you normally report your rental income and expenses on Schedule E, Part I. Nonresidents state tax forms List your total income, expenses, and depreciation for each rental property. Nonresidents state tax forms Be sure to enter the number of fair rental and personal use days on line 2. Nonresidents state tax forms If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Nonresidents state tax forms Complete lines 1 and 2 for each property. Nonresidents state tax forms However, fill in lines 23a through 26 on only one Schedule E. Nonresidents state tax forms On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Nonresidents state tax forms To find out if you need to attach Form 4562, see Form 4562 , later. Nonresidents state tax forms If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Nonresidents state tax forms Form 6198, At-Risk Limitations. Nonresidents state tax forms See At-Risk Rules , later. Nonresidents state tax forms Also see Publication 925. Nonresidents state tax forms Form 8582, Passive Activity Loss Limitations. Nonresidents state tax forms See Passive Activity Limits , later. Nonresidents state tax forms Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Nonresidents state tax forms If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Nonresidents state tax forms Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Nonresidents state tax forms Form 4562. Nonresidents state tax forms   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. Nonresidents state tax forms Otherwise, figure your depreciation on your own worksheet. Nonresidents state tax forms You do not have to attach these computations to your return, but you should keep them in your records for future reference. Nonresidents state tax forms   See Publication 946 for information on preparing Form 4562. Nonresidents state tax forms Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. Nonresidents state tax forms Providing substantial services. Nonresidents state tax forms   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Nonresidents state tax forms Use Form 1065, U. Nonresidents state tax forms S. Nonresidents state tax forms Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Nonresidents state tax forms Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Nonresidents state tax forms For information, see Publication 334, Tax Guide for Small Business. Nonresidents state tax forms Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Nonresidents state tax forms For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. Nonresidents state tax forms Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Nonresidents state tax forms This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Nonresidents state tax forms If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). Nonresidents state tax forms You will not be required to file Form 1065 for any year the election is in effect. Nonresidents state tax forms Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. Nonresidents state tax forms If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. Nonresidents state tax forms For more information on qualified joint ventures, go to IRS. Nonresidents state tax forms gov and enter “qualified joint venture” in the search box. Nonresidents state tax forms Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Nonresidents state tax forms You must consider these rules in the order shown below. Nonresidents state tax forms Both are discussed in this section. Nonresidents state tax forms At-risk rules. Nonresidents state tax forms These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Nonresidents state tax forms This applies only if the real property was placed in service after 1986. Nonresidents state tax forms Passive activity limits. Nonresidents state tax forms Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Nonresidents state tax forms However, there are exceptions. Nonresidents state tax forms At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Nonresidents state tax forms Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Nonresidents state tax forms In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Nonresidents state tax forms You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Nonresidents state tax forms Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. Nonresidents state tax forms See Publication 925 for a discussion of the at-risk rules. Nonresidents state tax forms Form 6198. Nonresidents state tax forms   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. Nonresidents state tax forms Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Nonresidents state tax forms For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Nonresidents state tax forms For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. Nonresidents state tax forms Deductions or losses from passive activities are limited. Nonresidents state tax forms You generally cannot offset income, other than passive income, with losses from passive activities. Nonresidents state tax forms Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Nonresidents state tax forms Any excess loss or credit is carried forward to the next tax year. Nonresidents state tax forms Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. Nonresidents state tax forms For a detailed discussion of these rules, see Publication 925. Nonresidents state tax forms Real estate professionals. Nonresidents state tax forms   If you are a real estate professional, complete line 43 of Schedule E. Nonresidents state tax forms      You qualify as a real estate professional for the tax year if you meet both of the following requirements. Nonresidents state tax forms More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. Nonresidents state tax forms You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. Nonresidents state tax forms If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Nonresidents state tax forms For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. Nonresidents state tax forms   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. Nonresidents state tax forms You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. Nonresidents state tax forms   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. Nonresidents state tax forms However, you can count your spouse's participation in an activity in determining if you materially participated. Nonresidents state tax forms Real property trades or businesses. Nonresidents state tax forms   A real property trade or business is a trade or business that does any of the following with real property. Nonresidents state tax forms Develops or redevelops it. Nonresidents state tax forms Constructs or reconstructs it. Nonresidents state tax forms Acquires it. Nonresidents state tax forms Converts it. Nonresidents state tax forms Rents or leases it. Nonresidents state tax forms Operates or manages it. Nonresidents state tax forms Brokers it. Nonresidents state tax forms Choice to treat all interests as one activity. Nonresidents state tax forms   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. Nonresidents state tax forms You can make this choice for any year that you qualify as a real estate professional. Nonresidents state tax forms If you forgo making the choice for one year, you can still make it for a later year. Nonresidents state tax forms   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. Nonresidents state tax forms This is true even if you are not a real estate professional in any intervening year. Nonresidents state tax forms (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. Nonresidents state tax forms )   See the Instructions for Schedule E for information about making this choice. Nonresidents state tax forms Material participation. Nonresidents state tax forms   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. Nonresidents state tax forms For details, see Publication 925 or the Instructions for Schedule C. Nonresidents state tax forms Participating spouse. Nonresidents state tax forms   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. Nonresidents state tax forms Do this even if your spouse owns no interest in the activity or files a separate return for the year. Nonresidents state tax forms Form 8582. Nonresidents state tax forms    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Nonresidents state tax forms See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. Nonresidents state tax forms   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. Nonresidents state tax forms Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Nonresidents state tax forms Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Nonresidents state tax forms Exception for Rental Real Estate With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Nonresidents state tax forms This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Nonresidents state tax forms Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Nonresidents state tax forms Example. Nonresidents state tax forms Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. Nonresidents state tax forms $2,000 of Jane's $3,500 loss offsets her passive income. Nonresidents state tax forms The remaining $1,500 loss can be deducted from her $40,000 wages. Nonresidents state tax forms The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. Nonresidents state tax forms Active participation. Nonresidents state tax forms   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Nonresidents state tax forms Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. Nonresidents state tax forms Example. Nonresidents state tax forms Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. Nonresidents state tax forms Mike had advertised and rented the house to the current tenant himself. Nonresidents state tax forms He also collected the rents, which usually came by mail. Nonresidents state tax forms All repairs were either made or contracted out by Mike. Nonresidents state tax forms Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. Nonresidents state tax forms Maximum special allowance. Nonresidents state tax forms   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Nonresidents state tax forms   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Nonresidents state tax forms If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Nonresidents state tax forms   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Nonresidents state tax forms Modified adjusted gross income (MAGI). Nonresidents state tax forms   This is your adjusted gross income from Form 1040, U. Nonresidents state tax forms S. Nonresidents state tax forms Individual Income Tax Return, line 38, or Form 1040NR, U. Nonresidents state tax forms S. Nonresidents state tax forms Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. Nonresidents state tax forms S. Nonresidents state tax forms savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). Nonresidents state tax forms Form 8582 not required. Nonresidents state tax forms   Do not complete Form 8582 if you meet all of the following conditions. Nonresidents state tax forms Your only passive activities were rental real estate activities in which you actively participated. Nonresidents state tax forms Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). Nonresidents state tax forms If married filing separately, you lived apart from your spouse all year. Nonresidents state tax forms You have no prior year unallowed losses from these (or any other passive) activities. Nonresidents state tax forms You have no current or prior year unallowed credits from passive activities. Nonresidents state tax forms Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). Nonresidents state tax forms You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. Nonresidents state tax forms   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. Nonresidents state tax forms On lines 23a through 23e of your Schedule E, enter the applicable amounts. Nonresidents state tax forms Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. Nonresidents state tax forms You may be able to deduct the loss on your income tax return. Nonresidents state tax forms Casualty. Nonresidents state tax forms   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Nonresidents state tax forms Such events include a storm, fire, or earthquake. Nonresidents state tax forms Theft. Nonresidents state tax forms   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. Nonresidents state tax forms Gain from casualty or theft. Nonresidents state tax forms   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. Nonresidents state tax forms Generally, you must report this gain. Nonresidents state tax forms However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. Nonresidents state tax forms To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. Nonresidents state tax forms In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. Nonresidents state tax forms The cost of the replacement property must be equal to or more than the net insurance or other payment you received. Nonresidents state tax forms More information. Nonresidents state tax forms   For information on business and nonbusiness casualty and theft losses, see Publication 547. Nonresidents state tax forms How to report. Nonresidents state tax forms    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. Nonresidents state tax forms Follow the Instructions for Form 4684 for where to carry your net gain or loss. Nonresidents state tax forms Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. Nonresidents state tax forms In 2013, she rented it all 12 months for a monthly rental fee of $1,125. Nonresidents state tax forms In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. Nonresidents state tax forms Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. Nonresidents state tax forms This means using the straight line method over a recovery period of 27. Nonresidents state tax forms 5 years. Nonresidents state tax forms She uses Table 2-2d to find her depreciation percentage. Nonresidents state tax forms Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. Nonresidents state tax forms For year 6, the rate is 3. Nonresidents state tax forms 636%. Nonresidents state tax forms Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. Nonresidents state tax forms 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. Nonresidents state tax forms Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. Nonresidents state tax forms Marie also meets all of the requirements for not having to file Form 8582. Nonresidents state tax forms She uses Schedule E, Part I, to report her rental income and expenses. Nonresidents state tax forms She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. Nonresidents state tax forms Form 4562 is not required. Nonresidents state tax forms Prev  Up  Next   Home   More Online Publications
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The Nonresidents State Tax Forms

Nonresidents state tax forms Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Nonresidents state tax forms Property not disposed of or abandoned. Nonresidents state tax forms Special rule for normal retirements from item accounts. Nonresidents state tax forms Abandoned property. Nonresidents state tax forms Single item accounts. Nonresidents state tax forms Multiple property account. Nonresidents state tax forms Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods 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 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Nonresidents state tax forms If your property qualified for MACRS, you must depreciate it under MACRS. Nonresidents state tax forms See Publication 946. Nonresidents state tax forms However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Nonresidents state tax forms Also, you can elect to exclude certain property from being depreciated under MACRS. Nonresidents state tax forms Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Nonresidents state tax forms Intangible property. Nonresidents state tax forms   You cannot depreciate intangible property under ACRS or MACRS. Nonresidents state tax forms You depreciate intangible property using any other reasonable method, usually, the straight line method. Nonresidents state tax forms Note. Nonresidents state tax forms The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Nonresidents state tax forms For more information, see chapter 12 of Publication 535. Nonresidents state tax forms Public utility property. Nonresidents state tax forms   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Nonresidents state tax forms This type of property is subject to depreciation under a special rule. Nonresidents state tax forms Videocassettes. Nonresidents state tax forms   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Nonresidents state tax forms You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Nonresidents state tax forms The straight line method, salvage value, and useful life are discussed later under Methods To Use. Nonresidents state tax forms You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Nonresidents state tax forms How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Nonresidents state tax forms These methods are straight line and declining balance. Nonresidents state tax forms To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Nonresidents state tax forms They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Nonresidents state tax forms The amount of the deduction in any year also depends on which method of depreciation you choose. Nonresidents state tax forms Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Nonresidents state tax forms The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Nonresidents state tax forms Your original basis is usually the purchase price. Nonresidents state tax forms However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Nonresidents state tax forms Adjusted basis. Nonresidents state tax forms   Events will often change the basis of property. Nonresidents state tax forms When this occurs, the changed basis is called the adjusted basis. Nonresidents state tax forms Some events, such as improvements you make, increase basis. Nonresidents state tax forms Events such as deducting casualty losses and depreciation decrease basis. Nonresidents state tax forms If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Nonresidents state tax forms   Publication 551 explains how to figure basis for property acquired in different ways. Nonresidents state tax forms It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Nonresidents state tax forms Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Nonresidents state tax forms It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Nonresidents state tax forms It is how long it will continue to be useful to you, not how long the property will last. Nonresidents state tax forms Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Nonresidents state tax forms The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Nonresidents state tax forms Consider all these factors before you arrive at a useful life for your property. Nonresidents state tax forms The useful life of the same type of property varies from user to user. Nonresidents state tax forms When you determine the useful life of your property, keep in mind your own experience with similar property. Nonresidents state tax forms You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Nonresidents state tax forms Change in useful life. Nonresidents state tax forms   You base your estimate of useful life on certain facts. Nonresidents state tax forms If these facts change significantly, you can adjust your estimate of the remaining useful life. Nonresidents state tax forms However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Nonresidents state tax forms Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Nonresidents state tax forms You generally cannot depreciate property below a reasonable salvage value. Nonresidents state tax forms Determining salvage value. Nonresidents state tax forms   Salvage value is the estimated value of property at the end of its useful life. Nonresidents state tax forms It is what you expect to get for the property if you sell it after you can no longer use it productively. Nonresidents state tax forms You must estimate the salvage value of a piece of property when you first acquire it. Nonresidents state tax forms   Salvage value is affected both by how you use the property and how long you use it. Nonresidents state tax forms If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Nonresidents state tax forms However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Nonresidents state tax forms Changing salvage value. Nonresidents state tax forms   Once you determine the salvage value for property, you should not change it merely because prices have changed. Nonresidents state tax forms However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Nonresidents state tax forms When you redetermine the salvage value, take into account the facts that exist at the time. Nonresidents state tax forms Net salvage. Nonresidents state tax forms   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Nonresidents state tax forms You can choose either salvage value or net salvage when you figure depreciation. Nonresidents state tax forms You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Nonresidents state tax forms However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Nonresidents state tax forms Your salvage value can never be less than zero. Nonresidents state tax forms Ten percent rule. Nonresidents state tax forms   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Nonresidents state tax forms You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Nonresidents state tax forms If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Nonresidents state tax forms Methods To Use Two methods of depreciation are the straight line and declining balance methods. Nonresidents state tax forms If ACRS or MACRS does not apply, you can use one of these methods. Nonresidents state tax forms The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Nonresidents state tax forms Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Nonresidents state tax forms One of these methods was the straight line method. Nonresidents state tax forms This method was also used for intangible property. Nonresidents state tax forms It lets you deduct the same amount of depreciation each year. Nonresidents state tax forms To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Nonresidents state tax forms Subtract the salvage value, if any, from the adjusted basis. Nonresidents state tax forms The balance is the total amount of depreciation you can take over the useful life of the property. Nonresidents state tax forms Divide the balance by the number of years remaining in the useful life. Nonresidents state tax forms This gives you the amount of your yearly depreciation deduction. Nonresidents state tax forms Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Nonresidents state tax forms If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Nonresidents state tax forms Example. Nonresidents state tax forms In April 1994, Frank bought a franchise for $5,600. Nonresidents state tax forms It expires in 10 years. Nonresidents state tax forms This property is intangible property that cannot be depreciated under MACRS. Nonresidents state tax forms Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Nonresidents state tax forms He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Nonresidents state tax forms He must prorate the $560 for his 9 months of use in 1994. Nonresidents state tax forms This gives him a deduction of $420 ($560 ÷ 9/12). Nonresidents state tax forms In 1995, Frank can deduct $560 for the full year. Nonresidents state tax forms Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Nonresidents state tax forms The rate cannot be more than twice the straight line rate. Nonresidents state tax forms Rate of depreciation. Nonresidents state tax forms   Under this method, you must determine your declining balance rate of depreciation. Nonresidents state tax forms The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Nonresidents state tax forms (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Nonresidents state tax forms ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Nonresidents state tax forms Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Nonresidents state tax forms Depreciation deductions. Nonresidents state tax forms   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Nonresidents state tax forms This gives you the amount of your deduction. Nonresidents state tax forms For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Nonresidents state tax forms To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Nonresidents state tax forms Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Nonresidents state tax forms Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Nonresidents state tax forms Your depreciation deduction for the second year is $1,600. Nonresidents state tax forms   As you can see from this example, your adjusted basis in the property gets smaller each year. Nonresidents state tax forms Also, under this method, deductions are larger in the earlier years and smaller in the later years. Nonresidents state tax forms You can make a change to the straight line method without consent. Nonresidents state tax forms Salvage value. Nonresidents state tax forms   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Nonresidents state tax forms However, you cannot depreciate the property below its reasonable salvage value. Nonresidents state tax forms Determine salvage value using the rules discussed earlier, including the special 10% rule. Nonresidents state tax forms Example. Nonresidents state tax forms If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Nonresidents state tax forms But if your estimate of salvage value was $900, you can only deduct $100. Nonresidents state tax forms This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Nonresidents state tax forms Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Nonresidents state tax forms You can group the videocassettes by title for making this projection. Nonresidents state tax forms You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Nonresidents state tax forms The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Nonresidents state tax forms For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Nonresidents state tax forms How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Nonresidents state tax forms If you change your method of depreciation, it is generally a change in your method of accounting. Nonresidents state tax forms You must get IRS consent before making the change. Nonresidents state tax forms However, you do not need permission for certain changes in your method of depreciation. Nonresidents state tax forms The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Nonresidents state tax forms For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Nonresidents state tax forms Change to the straight line method. Nonresidents state tax forms   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Nonresidents state tax forms However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Nonresidents state tax forms When the change is made, figure depreciation based on your adjusted basis in the property at that time. Nonresidents state tax forms Your adjusted basis takes into account all previous depreciation deductions. Nonresidents state tax forms Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Nonresidents state tax forms   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Nonresidents state tax forms You cannot make the change on an amended return filed after the due date of the original return (including extensions). Nonresidents state tax forms   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Nonresidents state tax forms   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Nonresidents state tax forms Changes that require permission. Nonresidents state tax forms   For most other changes in method of depreciation, you must get permission from the IRS. Nonresidents state tax forms To request a change in method of depreciation, file Form 3115. Nonresidents state tax forms File the application within the first 180 days of the tax year the change is to become effective. Nonresidents state tax forms In most cases, there is a user fee that must accompany Form 3115. Nonresidents state tax forms See the instructions for Form 3115 to determine if a fee is required. Nonresidents state tax forms Changes granted automatically. Nonresidents state tax forms   The IRS automatically approves certain changes of a method of depreciation. Nonresidents state tax forms But, you must file Form 3115 for these automatic changes. Nonresidents state tax forms   However, IRS can deny permission if Form 3115 is not filed on time. Nonresidents state tax forms For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Nonresidents state tax forms B. Nonresidents state tax forms 420. Nonresidents state tax forms Changes for which approval is not automatic. Nonresidents state tax forms   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Nonresidents state tax forms   You must request and receive permission for these changes. Nonresidents state tax forms To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Nonresidents state tax forms Change from an improper method. Nonresidents state tax forms   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Nonresidents state tax forms You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Nonresidents state tax forms If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Nonresidents state tax forms However, you must file the amended return before the filing date for the next tax year. Nonresidents state tax forms Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Nonresidents state tax forms You can do this by selling, exchanging, or abandoning the item of property. Nonresidents state tax forms You can also withdraw it from use without disposing of it. Nonresidents state tax forms For example, you could place it in a supplies or scrap account. Nonresidents state tax forms Retirements can be either normal or abnormal depending on all facts and circumstances. Nonresidents state tax forms The rules discussed next do not apply to MACRS and ACRS property. Nonresidents state tax forms Normal retirement. Nonresidents state tax forms   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Nonresidents state tax forms A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Nonresidents state tax forms Abnormal retirement. Nonresidents state tax forms   A retirement can be abnormal if you withdraw the property early or under other circumstances. Nonresidents state tax forms For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Nonresidents state tax forms Gain or loss on retirement. Nonresidents state tax forms   There are special rules for figuring the gain or loss on retirement of property. Nonresidents state tax forms The gain or loss will depend on several factors. Nonresidents state tax forms These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Nonresidents state tax forms A single property account contains only one item of property. Nonresidents state tax forms A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Nonresidents state tax forms Sale or exchange. Nonresidents state tax forms   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Nonresidents state tax forms See Publication 544. Nonresidents state tax forms Property not disposed of or abandoned. Nonresidents state tax forms   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Nonresidents state tax forms You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Nonresidents state tax forms However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Nonresidents state tax forms   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Nonresidents state tax forms Special rule for normal retirements from item accounts. Nonresidents state tax forms   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Nonresidents state tax forms However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Nonresidents state tax forms   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Nonresidents state tax forms Abandoned property. Nonresidents state tax forms   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Nonresidents state tax forms However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Nonresidents state tax forms Basis of property retired. Nonresidents state tax forms   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Nonresidents state tax forms Single item accounts. Nonresidents state tax forms   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Nonresidents state tax forms This is generally the cost or other basis of the item of property less depreciation. Nonresidents state tax forms See Publication 551. Nonresidents state tax forms Multiple property account. Nonresidents state tax forms   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Nonresidents state tax forms If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Nonresidents state tax forms   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Nonresidents state tax forms The method of depreciation used for the multiple property account is used. Nonresidents state tax forms You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Nonresidents state tax forms Prev  Up  Next   Home   More Online Publications