Property (Basis, Sale of Home, etc.)
This is archived information that pertains only to the 2002 Tax Year. If you
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I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. Since you cannot exclude all of the gain, report the entire gain realized on Form 1040, Schedule D (PDF) line 8. Report the amount of exclusion you qualify for on the line directly below the line on which you report the gain. Write Section 121 exclusion in column (a) of that line and show the amount of the exclusion in column (f) as a loss (in parentheses).
For additional information on selling your home, refer to Publication 523 (PDF), Selling Your Home.
References: 11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture What kinds of property can be depreciated for tax purposes?
Only property used in a trade or business or in an income production activity can be depreciated. Additionally, the property must be something that wears out or becomes obsolete and it must have a determinable useful life substantially beyond the tax year. The kinds of property that can be depreciated include, but are not limited to, machinery, equipment, buildings, vehicles, and furniture. Depreciation is a complex topic. For more information, refer to Tax Topic 704, Depreciation, or Publication 946 (PDF), How to Depreciate Property, or Publication 534 (PDF), Depreciating Property Placed in Service Before 1987.
References: Can the entire acquisition cost of a computer that I purchased for my business be deducted as a business expense or do I have to use depreciation?
A deduction for depreciation of a computer for business use, whether all at once or over a recovery period, is reported on Form 4562 (PDF), Depreciation and Amortization, Part V. Generally, is depreciated over a 5-year period. However, if the computer is used more than 50% for business, then you may also have an option to expense the business portion in as little as one year (as a section 179 deduction) using Form 4562 Part I (as well as Part V). Taxable income from the active conduct of any trade or business must be at least as great as the section 179 deduction claimed. Dollar limits and investment limits also apply to the section 179 deduction. For more information on depreciation and the section 179 deduction, refer to Publication 946 (PDF), How to Depreciate Property.
References: I purchased a computer last year to do online day trading part-time from home for additional income. Can I deduct or depreciate the cost of the computer or internet connection from my investment income?
You may deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Form 1040, Schedule A (PDF), line 22, Itemized Deductions. This would include depreciation on the portion of your computer used for investment purposes, and the portion of your internet access charges used for investment purposes. These deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization, to compute the depreciation for the portion of your computer used for investment purposes. Unless the computer is used more than 50% for business purpose (as opposed to investment purposes), you cannot claim section 179 expensing of the computer or claim accelerated depreciation for it. For more information, refer to "Listed Property" in Publication 946 (PDF), How to Depreciate Property.
References: I purchased a computer to support my job-related activities. As an employee, can I write-off the entire allowed cost or will I have to depreciate it over a few years?
You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is: - For the convenience of your employer, and
- Required as a condition of your employment.
You cannot take a section 179 deduction for the item or claim accelerated depreciation unless your use of the computer is more than 50% business or job-related use (and you meet the two conditions listed above).
Section 179 deductions and accelerated depreciation methods are explained in Publication 946 (PDF), How to Depreciate Property.
References: I need to know the maximum deduction allowed for depreciation on a passenger vehicle purchased in 2002?
The maximum deduction that can be claimed for a used passenger vehicle or one that is Liberty Zone property that was placed in service in 2002 is $3,060 for the first year, $4,900 for the second year, $2,950 for the third year, and $1,775 for the fourth and following years. For a new passenger vehicle placed in service in 2002 (and not Liberty Zone property), the maximum deduction is $4,600 for the first year. Subsequent year limits are the same as for used vehicles. Increase deductions are also available for electric vehicles see Supplement to Publication 946 (PDF), How to Depreciate Property. For more information, refer to Car Expenses in Chapter 4, Local Transportation Expenses of Publication 463 (PDF), Travel, Entertainment, Gift, and Car Expenses and Special Rule for Passenger Automobiles in Chapter 4, Listed Property, of Publication 946 (PDF), How to Depreciate Property.
References: I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house, the basis won't be affected?
If you have qualified business use of your home and enough gross income from that business use to that entitle you to a depreciation deduction, you are required to reduce your basis in the home by the amount of depreciation allowed (deducted) or allowable (could have been deducted).
Whether you choose to deduct the depreciation on your current return(s) will not matter. For tax purposes, you will still be treated as if you had taken the allowable deduction, and your basis will have to be reduced. For more information, refer to Publication 946 (PDF), How to Depreciate Property, Publication 544 (PDF), Sales and Other Dispositions of Assets, and Publication 587 (PDF), Business Use of Your Home.
References: I have a rental property. Do I have to take depreciation on it?
You do not have to claim depreciation on your rental property on your tax return. However, when reporting the sale of the rental property you are required to reduce the basis of the property for allowable depreciation regardless of whether the depreciation deduction was taken or not. For more information, refer to Publication 544 (PDF), Sale or Other Dispositions of Assets, the Instructions for Form 4797, Sale of Business Property, and Publication 527 (PDF), Residential Rental Property (including vacation homes).
References: In calculating depreciation on both my rental apartment building and its furniture, what depreciation type, asset class, depreciation method, and recovery period should be used?
An apartment building rented for residential purposes is considered residential rental property. Residential rental property is depreciated, generally, over 27.5 years under the modified accelerated cost recovery system (MACRS) using the general depreciation system (GDS) straight line method with a mid-month convention. Furniture for use in residential rental property, generally, is depreciated over 5 years using the MACRS, GDS 200% double declining balance method with a half-year convention. The convention used may vary depending on when the property was placed in service. Publication 527 (PDF), Residential Rental Property, contains the appropriate depreciation tables as does Publication 946 (PDF), How to Depreciate Property. Attach Form 4562 (PDF), Depreciation and Amortization, to your individual income tax return to claim the depreciation for the year this property is placed into service and for each subsequent tax year in which you own the property.
References: We replaced the roof on a residential rental property and need to know what to use for the classification and recovery period to calculate depreciation?
Replacement of a roof on a residential rental property is a capital improvement to the structure. The roof is in the same class of property as the property to which it is attached. Since the property is residential rental property, the roof is generally depreciated over a residential rental property recovery period, of 27.5 years using the straight line method of depreciation and a mid-month convention. You cannot write off (or take a loss on) any remaining basis in the replaced roof. For more information, refer to Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: On residential rental property, would new windows and siding be considered a repair that could be deducted against income, or would they be capitalized as an improvement?
Replacement of windows and siding on a residential rental property is a capital improvement to the structure, provided the replacement improves the value of this property. The windows and siding, in that event, are in the same class of property as the property to which they are affixed. In this case, the windows and siding are generally depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention. For more information, refer to Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: We have incurred substantial repairs to our rental property: new roof, gutters, windows, furnace, and outside paint. What are the IRS rules concerning depreciation?
Replacements of roof, rain gutters, windows, and furnace on a residential rental property are capital improvements to the structure because they materially add to the value of your property or substantially prolong its life. The items would be in the same class of property as the rental property to which to which they are attached. Since the property is residential rental property, the items are generally depreciated over 27.5 years using the straight line method of depreciation and a mid-month convention.
Repairs, such as repainting the house, are currently deductible expenses. A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs. If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement. You should capitalize and depreciate the repair costs as the same class of property that you have restored or remodeled. For more information, refer to Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: How many years do I depreciate a new furnace installed as an improvement on residential rental property and what method do I use to compute the depreciation?
Replacement of a furnace in a residential rental property is a capital improvement to the structure. The furnace is in the same class of property as the property in which it is installed. Since the property is residential rental property, the furnace is, generally, depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention. For more information, refer to Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: I purchased a snowblower and a lawn mower strictly for use at a residential apartment building I own. Can I elect the section 179 deduction to fully deduct the costs of the snowblower and lawn mower?
You cannot claim section 179 expense for property held to produce rental income (since it is use in connection with the furnishing of lodging). These assets are classified as 5-year property and must be depreciated as directed in Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: 11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges We are selling rental property and have never claimed depreciation. What do we do about this when we file our taxes?
When reporting the sale of or computing gain or loss on rental property, you are required to make an adjustment to your basis for allowable depreciation regardless of whether the deduction was taken. For more information refer to Publication 544 (PDF), Sale or Other Dispositions of Assets, and the Instructions for Form 4797, Sales of Business Property.
If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting Method, to claim the depreciation that should have been taken. The Form 3115 must be timely filed for the same tax year in which you sell the rental property or an earlier tax year. If you placed in service the rental property only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to take deductions for the claimed depreciation.
References: 12.7 Small Business/Self-Employed/Other Business: Income & Expenses I use part of my living room as an office. Can I take a deduction for business use of my home?
In general, if you use a part of your home for both personal and business purposes, no expenses for business use of that part are deductible. Exceptions apply for qualified day-care providers and for the storage of inventory or product samples used in your business. For additional information on business use of your home, refer to Tax Topic 509, or Publication 587 (PDF), Business Use of Your Home (Including Use by Day-Care Providers).
References: If you lease purchase a piece of equipment, like a forklift or boom truck, do you deduct the lease or do you depreciate it?
There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. You must first determine whether your agreement is a lease or a conditional sales contract. If, under the agreement, you acquired or will acquire title to or equity in the property, you should treat the agreement as a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense.
Whether the agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the facts and circumstances that exist when you make the agreement.
In general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true: - The agreement applies part of each payment toward an equity interest that you will receive.
- You get title to the property upon the payment of a stated amount required under the contract.
- The amount you pay to use the property for a short time is a large part of the amount you would pay to get title to the property.
- You pay much more than the current fair rental value for the property.
- You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you make the agreement.
- You have an option to buy the property at a nominal price compared to the total amount you have to pay under the lease.
- The lease designates some part of the payments as interest, or part of the payments are easy to recognize as interest.
References: If you lease office equipment and machinery with the option to buy, when do you depreciate the purchase price?
If you lease equipment with the option to later buy the equipment, you must first determine whether your agreement is a lease agreement or a conditional sales contract. If, under the agreement, you acquired or will acquire title to or equity in the property, you should treat the agreement as a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense. You would start depreciating the equipment on the date you acquired the equipment.
Whether the agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the facts and circumstances that exist when you make the agreement
In general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. - The agreement applies part of each payment toward an equity interest that you will receive.
- You get title to the property upon the payment of a stated amount required under the contract.
- The amount you pay to use the property for a short time is a large part of the amount you would pay to get title to the property.
- You pay much more than the current fair rental value for the property.
- You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you make the agreement.
- You have an option to buy the property at a nominal price compared to the total amount you have to pay under the lease.
- The lease designates some part of the payments as interest, or part of the payments are easy to recognize as interest.
References:
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