Publication 527 |
2000 Tax Year |
Depreciation
When you use your property to produce income, such as rents, you
can recover (get back) some or all of what you paid for the property
through tax deductions. You do this by depreciating the
property; that is, by deducting some of your cost on your tax return
each year.
Several factors determine how much depreciation you can deduct. The
main factors are: (1) your basis in the property, (2) the recovery
period for the property, and (3) the depreciation method used. You
cannot simply deduct your mortgage or principal payments as an
expense.
You can deduct depreciation only on the part of your property used
for rental purposes. Depreciation reduces your basis for figuring gain
or loss on a later sale or exchange.
You may have to use Form 4562 to figure and report your
depreciation. See How To Report Rental Income and Expenses,
later. Also see Publication 946.
Claiming the correct amount of depreciation.
You should claim the correct amount of depreciation each tax year.
If you did not claim depreciation that you were entitled to deduct,
you must still reduce your basis in the property by the amount of
depreciation that you should have deducted. If you did not deduct the
correct amount of depreciation for property in any year, you may be
able to make a correction for that year by filing Form 1040X,
Amended U.S. Individual Income Tax Return. 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.
See Changing your accounting method, later.
Amended return.
If you deducted an incorrect amount of depreciation, you can file
an amended return to correct the following.
- A mathematical error made in any year.
- A posting error made in any year.
- The amount of depreciation for property for which you have
not adopted a method of accounting for depreciation.
If an amended return is allowed, you must file it by the later of
the following:
- 3 years from the date you filed your original return for the
year in which you did not deduct the correct amount, or
- 2 years from the time you paid your tax for that
year.
A return filed early is considered filed on the due date.
If you have adopted a method of accounting for depreciation for
property, you cannot change the method by filing an amended return.
You have adopted a method of accounting if you deducted an incorrect
amount of depreciation for the property on two or more consecutively
filed tax returns.
Changing your accounting method.
To change your accounting method, you must file Form 3115,
Application for Change in Accounting Method, to get the consent
of the IRS. In some instances, that consent is automatic. For more
information, see Changing Your Accounting Method in
Publication 946.
What can be depreciated.
You can depreciate your property if it meets all the following
conditions.
- It is used in business or held for the production of income
(such as rental property).
- It has a determinable useful life that extends substantially
beyond the year it is placed in service.
- It is something that wears out, gets used up, decays,
becomes obsolete, or loses value from natural causes.
You can depreciate both real property, other than land
(discussed next), and personal property.
Real property.
Real property is land and, generally, anything that is built on,
growing on, or attached to land. Buildings, fences, sidewalks, and
trees are real property.
Personal property.
Personal property is property that is not real property. Furniture,
appliances, and lawn mowers are personal property.
Land.
You can never depreciate land. The costs of clearing, grading,
planting, and landscaping are usually all part of the cost of land and
are not depreciable.
Rented property.
Generally, if you pay rent on property, you cannot depreciate that
property. Usually, only the owner can depreciate it. If you make
permanent improvements to the property, you may be able to depreciate
the improvements. See Additions or improvements to property,
later.
Cooperative apartments.
If you rent your cooperative apartment to others, you can deduct
your share of the cooperative housing corporation's depreciation.
Figure your depreciation deduction as a tenant-stockholder in a
cooperative housing corporation in the following way.
- Figure the depreciation for all the depreciable real
property owned by the corporation. (Depreciation methods are discussed
later.) If you bought your cooperative stock after its first offering,
figure the depreciable basis of this property as follows.
- Multiply your cost per share by the total number of shares
outstanding.
- Add to the amount figured in (a) any mortgage debt on the
property on the date you bought the stock.
- Subtract from the amount figured in (b) any mortgage debt
that is not for the depreciable real property, such as the part for
the land.
- Subtract from (1) any depreciation for space owned by the
corporation that can be rented but cannot be lived in by
tenant-stockholders. The result is the yearly depreciation as
reduced.
- Divide the number of your shares of stock by the total
number of shares outstanding, including any shares held by the
corporation.
- Multiply the yearly depreciation as reduced (from (2)) by
the percentage you figured in (3). This is your share of the
depreciation.
Your depreciation deduction for the year cannot be more than the
part of your adjusted basis (defined later) in the stock of the
corporation that is for your rental property.
See Cooperative apartments under What Can Be
Depreciated in chapter 1 of Publication 946
for more
information.
Cannot be more than basis.
The total of all your yearly depreciation deductions cannot be more
than the cost or other basis of the property. For this purpose, your
yearly depreciation deductions include any depreciation that you were
allowed to claim, even if you did not claim it.
Table 3
Depreciation systems.
There are three ways to figure depreciation. The depreciation
system you use depends on the type of property and when it was placed
in service. For property used in rental activities you use:
- Modified Accelerated Cost Recovery Systems (MACRS) for
property placed in service after 1986,
- Accelerated Cost Recovery Systems (ACRS) for property placed
in service after 1980 but before 1987, or
- Useful lives and either straight line or an accelerated
method of depreciation, such as the declining balance method, for
property placed in service before 1981.
This publication discusses MACRS only. If you need information
about depreciating property placed in service before 1987, see
Publication 534.
If you placed property in service before 2000, continue to use the
same method of figuring depreciation that you used in the past.
Section 179 deduction.
You cannot claim the section 179 deduction for property held to
produce rental income (unless renting property is your trade or
business). See chapter 2 of Publication 946.
Alternative minimum tax.
If you use accelerated depreciation, you may have to file Form
6251, Alternative Minimum Tax. Accelerated
depreciation includes MACRS, ACRS, and any other method that allows
you to deduct more depreciation than you could deduct using a straight
line method.
MACRS
In general, tangible property placed in service during 2000 is
depreciated using MACRS.
MACRS consists of two systems that determine how you depreciate
your property. The main system is called the General Depreciation
System (GDS). The second system is called the Alternative
Depreciation System (ADS). GDS is used to figure your
depreciation deduction for property used in most rental activities,
unless you elect ADS.
To figure your MACRS deduction, you need to know the following
information about your property:
- Its recovery period,
- Its placed-in-service date, and
- Its depreciable basis.
Personal home changed to rental use.
You must use MACRS to figure the depreciation on property used as
your home and changed to rental property in 2000.
Excluded property.
You cannot use MACRS for certain personal property placed in
service in your rental property in 2000 if it had been previously
placed in service before MACRS became effective. Generally, 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. However, the
property is not excluded if your 2000 deduction under MACRS (using a
half-year convention) is less than the deduction you would have under
ACRS. See What Cannot Be Depreciated Under MACRS in
Publication 946
for more information.
Recovery Periods Under GDS
Each item of property that can be depreciated is assigned to a
property class. The recovery period of the property depends on the
class the property is in. The property classes 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.
The class to which property is assigned is determined by its class
life. Class lives and recovery periods for most assets are listed in
Appendix B in Publication 946.
Under GDS, property that you placed in service during 2000 in your
rental activities generally falls into one of the following classes.
Also see Table 3.
- 5-year property. This class includes computers
and peripheral equipment, office machinery (typewriters, calculators,
copiers, etc.), automobiles, and light trucks.
This class also includes appliances, carpeting, furniture, etc.,
used in a rental real estate activity.
Depreciation on automobiles, certain computers, and cellular
telephones is limited. See chapter 4 of Publication 946.
- 7-year property. This class includes office
furniture and equipment (desks, files, etc.). 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.
- 15-year property. This class includes roads and
shrubbery (if depreciable).
- Residential rental property.
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. A dwelling unit is a house or an
apartment used to provide living accommodations in a building or
structure. 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. 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. Residential rental property is depreciated over 27.5
years.
The other recovery classes do not generally apply to property used
in rental activities. These classes are not discussed in this
publication. See Publication 946
for more information.
Qualified Indian reservation property.
For the applicable recovery period for qualified Indian reservation
property, see Publication 946.
Additions or improvements to property.
Treat depreciable additions or improvements you make to any
property as separate property items for depreciation purposes. 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.
The class and recovery period of the addition or improvement is the
one that would apply to the underlying property if it were placed in
service at the same time as the addition or improvement.
Example.
You own a residential rental house that you have been renting out
since 1980 and that you are depreciating under ACRS. You put an
addition onto the house and placed the improvement in service in 2000.
You must use MACRS for the addition. Under MACRS, the addition is
depreciated as residential rental property.
Placed-in-Service Date
You can begin to depreciate property when you place it in service
in your trade or business or for the production of income. Property is
considered placed in service in a rental activity when it is ready and
available for a specific use in that activity.
Example 1.
On November 22 of last year, you purchased a dishwasher for your
rental property. The appliance was delivered on December 7, but was
not installed and ready for use until January 3 of this year. Because
the dishwasher was not ready for use last year, it is not considered
placed in service until this year.
If the appliance had been 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.
Example 2.
On April 6, you purchased a house to use as residential rental
property. You made extensive repairs to the house and had it ready for
rent on July 5. You began to advertise the house for rent in July and
actually rented it out beginning September 1. The house is considered
placed in service in July when it was ready and available for rent.
You can begin to depreciate the house in July.
Example 3.
You moved from your home in July. During August and September you
made several repairs to the house. On October 1, you listed the
property for rent with a real estate company, which rented it on
December 1. The property is considered placed in service on October 1,
the date when it was available for rent.
Depreciable Basis
The depreciable basis of property used in a rental activity is
generally its adjusted basis when you place it in service in that
activity. 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. Basis and adjusted basis are explained in the
following discussions.
However, if you used the property for personal purposes before
changing it to rental use, its depreciable basis is the lesser of its
adjusted basis or its fair market value when you change it to rental
use. See Basis of Property Changed to Rental Use, later.
Cost Basis
The basis of property you buy is usually its cost. The cost is the
amount you pay for it in cash, in debt obligation, in other property,
or in services. Your cost also includes amounts you pay for:
- Sales tax charged on the purchase,
- Freight charges to obtain the property, and
- Installation and testing charges.
Loans with low or no interest.
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. See Unstated
Interest and Original Issue Discount in Publication 537,
Installment Sales.
Real property.
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.
Real estate taxes.
If you buy real property and agree to pay real estate taxes on it
that were owed by the seller and the seller did not reimburse you, the
taxes you pay are treated as part of your basis in the property. You
cannot deduct them as taxes paid.
If you reimburse the seller for real estate taxes the seller paid
for you, you can usually deduct that amount. Do not include that
amount in the basis of the property.
Settlement fees and other costs.
Settlement fees and closing costs that are for buying the property
are part of your basis in the property. These include:
- Abstract fees,
- Charges for installing utility services,
- Legal fees,
- Recording fees,
- Surveys,
- Transfer taxes,
- Title insurance, and
- 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.
Some settlement fees and closing costs you cannot
include in the basis of the property are:
- Fire insurance premiums,
- Rent or other charges relating to occupancy of the property
before closing, and
- 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.
Also, do not include amounts placed in escrow for the future
payment of items such as taxes and insurance.
Assumption of a mortgage.
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 that still must be paid on the mortgage.
Example.
You buy a building for $60,000 cash and assume a mortgage of
$240,000 on it. Your basis is $300,000.
Land and buildings.
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.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.
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 the
assessed values for real estate tax purposes.
Example.
You buy a house and land for $100,000. The purchase contract does
not specify how much of the purchase price is for the house and how
much is for the land.
The latest real estate tax assessment on the property was based on
an assessed value of $80,000, of which $68,000 is for the house and
$12,000 is for the land.
You can allocate 85% ($68,000 x $80,000) of the purchase
price to the house and 15% ($12,000 x $80,000) of the purchase
price to the land.
Your basis in the house is $85,000 (85% of $100,000) and your basis
in the land is $15,000 (15% of $100,000).
Basis Other Than Cost
There are many times when you cannot use cost as a basis. 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.
If you received property in one of these ways, see Publication 551
for information on how to figure your basis.
Adjusted Basis
Before you can figure allowable depreciation, you may have to make
certain adjustments (increases and decreases) to the basis of the
property. The result of these adjustments to the basis is the adjusted
basis.
Increases to basis.
You must increase the basis of any property by the cost of all
items properly added to a capital account. This includes:
- The cost of any improvements having a useful life of more
than one year,
- Amounts spent after a casualty to restore the damaged
property,
- The cost of extending utility service lines to the property,
and
- Legal fees, such as the cost of defending and perfecting
title.
Improvements.
Add to the basis of your property the amount an improvement
actually cost you, including any amount you borrowed to make the
improvement. This includes all direct costs, such as material and
labor, but not your own labor. It also includes all expenses related
to the improvement.
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. 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.
Keep separate accounts for depreciable improvements made after you
place the property in service in your rental activity. For information
on depreciating improvements, see Additions or improvements to
property, earlier, under Recovery Periods Under GDS.
The cost of landscaping improvements is usually treated as an
addition to the basis of the land, which is not depreciable property.
See What can be depreciated, earlier.
Assessments for local improvements.
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. For example, if your city installs curbing on the street in
front of your house, and assesses you and your neighbors for the cost
of curbing, you must add the assessment to the basis of your property.
Also add the cost of legal fees paid to obtain a decrease in an
assessment levied against property to pay for local improvements. You
cannot deduct these items as taxes or depreciate them.
Assessments for maintenance or repair or meeting interest charges
are deductible as taxes. Do not add them to your basis in the
property.
Deducting vs. capitalizing costs.
You cannot add to your basis costs that are deductible as current
expenses. However, there are certain costs you can choose either to
deduct or to capitalize. If you capitalize these costs, include them
in your basis. If you deduct them, do not include them in your basis.
The costs you may be able to choose to deduct or to capitalize
include carrying charges, such as interest and taxes, that you must
pay to own property.
For more information about deducting or capitalizing costs, see
chapter 8 in Publication 535.
Decreases to basis.
You must decrease the basis of your property by any items that
represent a return of your cost. These include:
- The amount of any insurance or other payment you receive as
the result of a casualty or theft loss,
- Any deductible casualty loss not covered by
insurance,
- Any amount you receive for granting an easement,
- Any residential energy credit you were allowed before 1986,
if you added the cost of the energy items to the basis of your home,
and
- The amount of depreciation you could have deducted on your
tax returns under the method of depreciation you selected. If you took
less depreciation than you could have under the method you selected,
you must decrease the basis by the amount you could have taken under
that method.
If you deducted more depreciation than you should have, you must
decrease your basis by the amount you should have deducted, plus the
part of the excess you deducted that actually lowered your tax
liability for any year.
Basis of Property
Changed to Rental Use
When you change property you held for personal use to rental use
(for example, you rent out your former home), you figure the basis for
depreciation using the lesser of fair market value or adjusted basis.
Fair market value.
This is the price at which the property would change hands between
a buyer and a seller, neither having to buy or sell, and both having
reasonable knowledge of all the relevant facts. Sales of similar
property, on or about the same date, may be helpful in figuring the
fair market value of the property.
Figuring the basis.
The basis for depreciation is the lesser of:
- The fair market value of the property on the date you
changed it to rental use, or
- Your adjusted basis on the date of the change--that is,
your original cost or other basis of the property, plus the cost of
permanent improvements or additions since you acquired it, minus
deductions for any casualty or theft losses claimed on earlier years'
income tax returns and other decreases to basis.
Example.
Several years ago you built your home for $40,000 on a lot that
cost you $4,000. Before changing the property to rental use last year,
you added $8,000 of permanent improvements to the house and claimed a
$1,000 deduction for a casualty loss to the house. Because land is not
depreciable, you can only include the cost of the house when figuring
the basis for depreciation.
The adjusted basis of the house at the time of the change in use
was $47,000 ($40,000 + $8,000 - $1,000).
On the date of the change in use, your property had a fair market
value of $48,000, of which $6,000 was for the land and $42,000 was for
the house.
The basis for depreciation on the house is the fair market value at
the date of the change ($42,000), because it is less than your
adjusted basis ($47,000).
MACRS Depreciation
Under GDS
You can figure your MACRS depreciation deduction under GDS in one
of two ways. The deduction is substantially the same both ways. (The
difference, if any, is slight.) 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 optional MACRS tables, shown
later.
If you actually compute the deduction, the depreciation method
you use depends on the class of the property.
5-, 7-, or 15-year property.
For property in the 5- or 7-year class, use the double (200%)
declining balance method and a half-year convention. However, you must
use the mid-quarter convention, if it applies. These conventions are
explained later. For property in the 15-year class, use the 150%
declining balance method and a half-year convention.
You can also choose to use the 150% declining balance method for
property in the 5- or 7-year class. 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.
You make this election on Form 4562. In column (f), Part II, enter
"150 DB."
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 a larger deduction.
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.
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. You elect the straight
line method on Form 4562. In column (f), Part II, enter "S/L."
Once you make this election, you cannot change to another method.
Residential rental property.
You must use the straight line method and a mid-month convention
for residential rental property.
Declining Balance Method
To figure your MACRS deduction, first determine your declining
balance rate from the table below. However, if you elect to use the
150% declining balance method for 5- or 7-year property, figure the
declining balance rate by dividing 1.5 (150%) by the recovery period
for the property.
In the first tax year, multiply the adjusted basis of the property
by the declining balance rate and apply the appropriate convention to
figure your depreciation. In later years, use the following steps to
figure your depreciation.
- Adjust your basis by subtracting the amount of depreciation
allowable for the earlier years.
- Multiply your adjusted basis in (1) by the same rate used in
the first year.
See Conventions, later, for information on
depreciation in the year you dispose of property.
Declining balance rates.
The following table shows the declining balance rate that applies
for each class of property and the first year for which the straight
line method will give a greater deduction. (The rates for 5- and
7-year property are based on the 200% declining balance method. The
rate for 15-year property is based on the 150% declining balance
method.)
Class |
Declining Balance Rate |
Year |
5 |
40% |
4th |
7 |
28.57% |
5th |
15 |
10% |
7th |
Straight Line Method
To figure your MACRS deduction under the straight line method, you
must figure a new depreciation rate for each tax year in the recovery
period.
For any tax year, figure the straight line rate by dividing the
number 1 by the years remaining in the recovery period at the
beginning of the tax year. When figuring the number of years
remaining, you must take into account the convention used in the first
year. If the remaining recovery period at the beginning of the tax
year is less than one year, the straight line rate for that tax year
is 100%.
Multiply the adjusted basis of the property by the straight line
rate. You must figure the depreciation for the first year using the
convention that applies. (See Conventions, later.)
Example.
For property with a 5-year recovery period, the straight line rate
is 20% (1 divided by 5) for the first tax year. After you apply the
half-year convention, the first year rate is 10% (20% divided by 2).
At the beginning of the second year, the remaining recovery period
is 4 1/2 years because of the half-year convention. The
straight line rate for the second year is 22.22% (1 divided by 4.5).
To figure your depreciation deduction for the second year:
- Subtract the depreciation taken in the first year from the
basis of the property, and
- Multiply the remaining basis in (1) by 22.22%.
Residential rental property.
In the first year that you claim depreciation for residential
rental property, you can only claim depreciation for the number of
months the property is in use, and you must use the mid-month
convention (explained under Conventions, next).
Conventions
To figure your depreciation deduction for both the year in which
you place property in service and the year in which you dispose of the
property, you use one of the following conventions.
- Mid-month convention.
- Half-year convention.
- Mid-quarter convention.
Mid-month convention.
A mid-month convention is used for residential rental property in
all situations. Under a mid-month convention, residential rental
property placed in service, or disposed of, during any month is
treated as placed in service, or disposed of, in the middle of that
month.
Half-year convention.
The half-year convention is used for property other than
residential rental property. The half-year convention treats all
property placed in service, or disposed of, during a tax year as
placed in service, or disposed of, in the middle of that tax year.
A half year of depreciation is allowable for the first year the
property is placed in service, regardless of when the property is
placed in service during the tax year. For each of the remaining years
of the recovery period, you will take a full year of depreciation. If
you hold the property for the entire recovery period, a half year of
depreciation is allowable for the year in which the recovery period
ends. If you dispose of the property before the end of the recovery
period, a half year of depreciation is allowable for the year of
disposition.
Mid-quarter convention.
A mid-quarter convention must be used in certain circumstances for
property other than residential rental property. This convention
applies if the total basis of such property that is placed in service
in the last 3 months of a tax year is more than 40% of the total basis
of all such property you place in service during the year.
Under a mid-quarter convention, all property placed in service, or
disposed of, during any quarter of a tax year is treated as placed in
service, or disposed of, in the middle of the quarter.
Do not include in the total basis any property placed in service
and disposed of during the same tax year.
Example.
During the tax year, Tom Martin purchased the following items to
use in his rental property.
- A dishwasher for $400 that he placed in service in January.
- Used furniture for $100 that he placed in service in
September.
- A refrigerator for $500 that he placed in service in
October.
Tom uses the calendar year as his tax year. The total basis of
all property placed in service that year is $1,000. The $500 basis of
the refrigerator placed in service during the last 3 months of his tax
year exceeds $400 (40% x $1,000). Tom must use the mid-quarter
convention for all three items.
Optional Tables
You can use the tables in Table 4 to compute annual
depreciation under MACRS. The tables show the percentages for the
first 6 years. See Appendix A of Publication 946
for
complete tables. The percentages in Tables 4-A,
4-B, and 4-C make the change from
declining balance to straight line in the year that straight line will
yield a larger deduction. See Declining Balance Method,
earlier.
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.
How to use the tables.
The following section explains how to use the optional tables.
Figure the depreciation deduction by multiplying your unadjusted
basis in the property by the percentage shown in the appropriate
table. Your unadjusted basis is your depreciable basis
without reduction for depreciation previously claimed.
Once you begin using an optional 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.
If there is an adjustment for any other reason (for example,
because of a deductible casualty loss) you can no longer use the
table. 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 MACRS Depreciation Under GDS.
Tables 4-A, 4-B, and 4-C.
The percentages in these tables take into account the half-year and
mid-quarter conventions. Use Table 4-A for 5-year
property, Table 4-B for 7-year property, and
Table 4-C for 15-year property. Use the percentage in
the second column (half-year convention) unless you must use the
mid-quarter convention (explained earlier). 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.
Example 1.
You purchased a stove and refrigerator and placed them in service
in February. Your basis in the stove is $300 and your basis in the
refrigerator is $500. Both are 5-year property. Using the half-year
convention column in Table 4-A, you find the
depreciation percentage for year 1 is 20%. For that year your
depreciation deduction is $60 ($300 x .20) for the stove and
$100 ($500 x .20) for the refrigerator.
For year 2, you find your depreciation percentage is 32%. That
year's depreciation deduction will be $96 ($300 x .32) for the
stove and $160 ($500 x .32) for the refrigerator.
Example 2.
Assume the same facts as in Example 1, except you buy
the refrigerator in October instead of February. You must use the
mid-quarter convention to figure depreciation on the stove and
refrigerator. The refrigerator was placed in service in the last 3
months of the tax year, and its basis ($500) is more than 40% of the
total basis of all property placed in service during the year ($800
x .40 = $320).
Because you placed the refrigerator in service in October, you use
the fourth quarter column of Table 4-A and find that
the depreciation percentage for year 1 is 5%. Your depreciation
deduction for the refrigerator is $25 ($500 x .05).
Because you placed the stove in service in February, you use the
first quarter column of Table 4-A and find that the
depreciation percentage for year 1 is 35%. For that year, your
depreciation deduction for the stove is $105 ($300 x .35).
Table 4-D.
Use this table for residential rental property. Find the row for
the month that you placed the property in service. Use the percentages
listed for that month to figure your depreciation deduction. The
mid-month convention is taken into account in the percentages shown in
the table.
Example.
You purchased a single family rental house and placed it in service
in February. Your basis in the house is $80,000. Using Table
4-D, you find that the percentage for property placed in
service in February of year 1 is 3.182%. That year's depreciation
deduction is $2,546 ($80,000 x .03182).
Table 4
MACRS Depreciation
Under ADS
If you choose, you can use the ADS method for most property. Under
ADS, you use the straight line method of depreciation.
Table 3 shows the recovery periods for property used in
rental activities that you depreciate under ADS.
See Appendix B in Publication 946
for other property. If
your property is not listed, it is considered to have no class life.
Use the mid-month convention for residential rental property. For
all other property, use the half-year or mid-quarter convention.
Election.
You choose to use ADS by entering the depreciation on line 16, Part
II of Form 4562.
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. However, the election applies on a
property-by-property basis for residential rental property.
Once you choose to use ADS, you cannot change your election.
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