Which Property Class Applies Under GDS?

Words you may need to know (see Glossary):

• Class life
• Nonresidential real property
• Placed in service
• Property class
• Recovery period
• Residential rental property
• Section 1250 property

The following is a list of the nine property classes under GDS and examples of the types of property included in each class.

1. 3-year property.
1. Tractor units for over-the-road use.
2. Any race horse over 2 years old when placed in service.
3. Any other horse over 12 years old when placed in service.
4. Qualified rent-to-own property (defined later).
2. 5-year property.
1. Automobiles, taxis, buses, and trucks.
2. Computers and peripheral equipment.
3. Office machinery (such as typewriters, calculators, and copiers).
4. Any property used in research and experimentation.
5. Breeding cattle and dairy cattle.
6. Appliances, carpets, furniture, etc., used in a residential rental real estate activity.
3. 7-year property.
1. Office furniture and fixtures (such as desks, files, and safes).
2. Agricultural machinery and equipment.
3. Any property that does not have a class life and has not been designated by law as being in any other class.
4. 10-year property.
1. Vessels, barges, tugs, and similar water transportation equipment.
2. Any single purpose agricultural or horticultural structure.
3. Any tree or vine bearing fruits or nuts.
5. 15-year property.
1. Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, and bridges).
2. Any retail motor fuels outlet (defined later), such as a convenience store.
6. 20-year property. This class includes farm buildings (other than single purpose agricultural or horticultural structures).
7. 25-year property. This class is water utility property, which is either of the following.
1. Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property.
2. Any municipal sewer.
8. Residential rental property. This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. A dwelling unit is a house or 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 the units are used on a transient basis. If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy.
9. Nonresidential real property. This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27.5 years.

If your property is not listed above, you can determine its property class from the Table of Class Lives and Recovery Periods in Appendix B. The property class is generally the same as the GDS recovery period indicated in the table.

Qualified rent-to-own property. Qualified rent-to-own property is property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract. It is tangible personal property generally used in the home for personal use. It includes computers and peripheral equipment, televisions, videocassette recorders, stereos, camcorders, appliances, furniture, washing machines and dryers, refrigerators, and other similar consumer durable property. Consumer durable property does not include real property, aircraft, boats, motor vehicles, or trailers.

If some of the property you rent to others under a rent-to-own agreement is of a type that may be used by the renters for either personal or business purposes, you can still treat this property as qualified property as long as it does not represent a significant portion of your leasing property. But, if this dual-use property does represent a significant portion of your leasing property, you must prove that this property is qualified rent-to-own property.

Rent-to-own dealer. You are a rent-to-own dealer if you meet all the following requirements.

• You regularly enter into rent-to-own contracts in the ordinary course of your business.
• A substantial portion of these contracts end with the customer returning the property before making all the payments required to transfer ownership.
• The property is tangible personal property of a type generally used within the home for personal use.

Rent-to-own contract. This is any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual. The lease contract must meet all the following requirements.

• Be titled "Rent-to-Own Agreement," "Lease Agreement with Ownership Option," or other similar language.
• Provide a beginning date and a maximum period of time, not to exceed 156 weeks or 36 months from the beginning date, for which the contract can be in effect (including renewals or options to extend).
• Provide for regular periodic weekly or monthly payments that can be either level or decreasing. If the payments are decreasing, no payment can be less than 40 percent of the largest payment.
• Provide for total payments that generally exceed the normal retail price of the property plus interest.
• Provide for total payments that do not exceed $10,000 for each item of property.
• Provide that the customer has no legal obligation to make all payments outlined in the contract and that, at the end of each weekly or monthly payment period, the customer can either continue to use the property by making the next payment or return the property in good working order with no further obligations and no entitlement to a return of any prior payments.
• Provide that legal title to the property remains with the rent-to-own dealer until the customer makes either all the required payments or the early purchase payments required under the contract to acquire legal title.
• Provide that the customer has no right to sell, sublease, mortgage, pawn, pledge, or otherwise dispose of the property until all contract payments have been made.

Retail motor fuels outlet. Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum or petroleum products (whether or not it is also used to sell food or other convenience items) and meets any one of the following three tests.

• It is not larger than 1,400 square feet.
• 50% or more of the gross revenues generated from the property are derived from petroleum sales.
• 50% or more of the floor space in the property is devoted to petroleum marketing sales.

A retail motor fuels outlet does not include any facility related to petroleum and natural gas trunk pipelines.

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