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Depreciation & Recapture

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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.

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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.

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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.

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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.

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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.

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What form and line do I deduct the 36.5 cents per mile on for my business travel and do I need to figure depreciation of the vehicle, too?

A Sole Proprietor's business use of a car or truck is claimed on line 10 of Form 1040 (PDF), Schedule C, Profit or Loss from Business or, if eligible, line 2 of Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You may use either the actual expense method in calculating your car or truck expense or, if eligible, the 2002 standard mileage rate of 36.5 cents per mile. Depreciation expense is already included in this standard mileage rate. Depreciation is only calculated as a separate expense when using the actual expense method. Deductible employee business use of a car or truck may be taken on Form 2106 (PDF), Employee Business Expenses, or if, eligible, line 1 of Form 2106-EZ (PDF), Unreimbursed Employee Business Expenses. The car and truck expenses are then taken with other employee business expenses on line 22, Form 1040, Schedule A&B (PDF) Itemized Deductions. For more information, refer to Publication 463 (PDF), Travel, Entertainment, Gift, and Car Expenses, and Publication 535 (PDF), Business Expenses.

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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I expensed equipment and furniture (not used for residential rental property) two years ago under section 179, but stopped doing business last year. Does any of this have to be recaptured and claimed as income, even though the items have not been sold?

If you claim a section 179 deduction for the cost of property in the year you place the property in service, and in a subsequent year, you do not use it more than 50 percent for business, you may have to recapture part of the section 179 deduction. This can occur in any year during the recovery period for the property even though the items have not been sold. Refer to Publication 946 (PDF), How to Depreciate Property, on how to calculate the recapture amount. The recapture amount is computed on part IV of Form 4797 (PDF), Sale of Business Property, and is included as other income on line 6 of Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship).

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When an individual sells a building, what depreciation is being recaptured? Is it the amount of depreciation taken in the prior years or the depreciation left?

Generally, the amount of depreciation you must recapture for residential rental or nonresidential real property is the excess of the depreciation allowed or allowable over straight line depreciation for the property. Thus, if you sell a building placed in service after 1986 which required the use of the straight-line method, you would not have any depreciation to recapture. However, if you took the 30% special depreciation allowance for your building, this allowance may be subject to recapture. For property placed in 1986 and earlier, see Publication 946 (PDF), How to Depreciate Property. For further information, refer to Publication 544 (PDF), Sales or Other Disposition of Assets, and Supplement to Publication 946 (PDF), How to Depreciate Property.

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How do I recapture depreciation on rental property that has been sold?

If you dispose of residential rental property placed in service after 1986 (or after July 31, 1986, if the election to use MACRS was made), you would not have any depreciation to recapture because you used a straight-line method. If you do have depreciation to recapture resulting from a gain on the sale, or because you did not meet the condition above, use Form 4797 (PDF), Sale of Business Property, to compute the amount of depreciation recapture.

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