What kinds of property can be depreciated for tax purposes?
Only property used in a trade or business or to produce income 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 machinery, equipment, buildings, vehicles, and furniture. Depreciation is a very complex subject. For more information, refer to Tax Topic 704, Depreciation, or Publication 946, How to Depreciate Property, or Publication 534, Depreciating Property Placed in Service Before 1987.
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We replaced the roof on a residential rental property and need to know what to use for the classification and useful life to calculate depreciation?
Replacement of a roof on a residential rental property is considered to be a capital improvement to the structure. The roof would be in the class of residential rental property with a recovery period of 27.5 years using the straight line method of depreciation. For more information, refer to Publication 527, Residential Rental Property, and Publication 946, 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 considered to be a capital improvement to the structure. The windows and siding would be in the class of residential rental property with a recovery period of 27.5 years using the straight line method of depreciation. For more information, refer to Publication 527, Residential Rental Property, and Publication 946, 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?
Replacement of roof, rain gutters, windows, and furnace on a residential rental property is considered to be a capital improvement to the structure. The items would be in the class of residential rental property with a recovery period of 27.5 years using the straight line method of depreciation. For more information, refer to Publication 527, Residential Rental Property, and Publication 946, How to Depreciate Property.
Repairs, such as repainting the house, are current 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 and subject to depreciation.
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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 considered to be a capital improvement to the structure. The furnace would be in the class of residential rental property with a recovery period of 27.5 years using the straight line method of depreciation. For more information, refer to Publication 527, Residential Rental Property, and Publication 946, How to Depreciate Property.
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I purchased a snowblower and a lawn mower strictly for use at an apartment building I own. Can I elect section 179 depreciation to fully deduct the costs of the snowblower and lawn mower?
You cannot claim the section 179 deduction for property held to produce rental income (unless renting property is your trade or business). These assets are classified as 5-year property and must be depreciated as directed in Publication 527, Residential Rental Property, and Publication 946, How to Depreciate Property.
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I expensed equipment and furniture 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 and, in a year after you place the property in service, you do not use it predominantly 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, How to Depreciate Property, on how to calculate the recapture amount. The recapture amount is computed on part IV of Form 4797, Sale of Business Property, and is included as other income on line 6 of Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship).
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When an individual sells a rental building, what depreciation is being recaptured? Is it the amount of depreciation taken in the prior years or the depreciation left?
It is the amount of allowed or allowable depreciation which was taken in prior years.
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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. If you do have depreciation to recapture, use Form 4797, Sale of Business Property, to compute the amount of depreciation recapture.
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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?
The computer that you purchased for your business would be reported on Form 4562, Depreciation and Amortization, Part V. A computer is depreciated over a 5-year period. If the computer is used more than 50% for business, then you also have an option to expense it in one year (a section 179 deduction) on the business portion, Form 4562 Part I if the business had taxable income at least as great as the section 179 deduction claimed. For more information on depreciation, refer to Publication 946, 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, 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. Use Form 4562, Depreciation and Amortization to compute the depreciation for the portion of your computer used for investment purposes. You cannot claim section 179 expensing of the computer since it is not a business asset.
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I purchased a computer to support my job related activities. I understand what percent of the computer I can deduct as an employee, but I do not understand if I can write off the entire allowed cost or if 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.
If you meet the above tests, you generally must depreciate your computer using the straight-line method. You cannot take a section 179 deduction for the item or claim an accelerated depreciation deduction unless you meet the more-than-50%-use test.
You meet the more-than-50%-use test if you use the computer more than 50% in your work. If you meet this test, you can take a section 179 deduction for the item and claim accelerated depreciation. The section 179 deduction and depreciation deductions are explained in Publication 946, How to Depreciate Property.
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I need to know the maximum deduction allowed for depreciation on a passenger vehicle purchased in 2000?
The maximum deduction that can be claimed for a passenger vehicle that was placed in service in 2000 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 more information, refer to Car Expenses in Chapter 4, Local Transportation Expenses of Publication 463, Travel, Entertainment, Gift, and Car Expenses and Special Rule for Passenger Automobiles in Chapter 4, Listed Property, of Publication 946, How to Depreciate Property.
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What form and line do I deduct the 32.5 cents per mile on for my business travel and do I need to figure depreciation of the vehicle, too?
Expenses for your business use of a car or truck are claimed on line 10 of Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship). You may use either the standard mileage rate or the actual cost method in calculating your car or truck expenses. If you use the standard mileage rate, do not compute or deduct depreciation. Depreciation is an expense that is used with the actual cost method. You may use either the standard mileage rate or the actual cost method in calculating your car or truck expenses. For more information, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
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I have a home office. Can I deduct expenses like mortgage, utilities, etc. without deducting depreciation so that when I sell this house, the basis won't be affected?
If you have qualified business use of your home that entitles 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 is reduced.
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If 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 make an adjustment for allowable depreciation regardless to whether or not it was taken. For more information, refer to Publication 544, Sale or Other Dispositions of Assets, and the Instructions for Form 4797, Sales of Business Property.
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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 is considered residential rental property. It is depreciated 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 in the rental property would be depreciated over 7 years using the MACRS, GDS 200% double declining method with a half-year convention. Publication 527, Residential Rental Property, contains the appropriate depreciation tables as does Publication 946, How to Depreciate Property. Attach Form 4562, Depreciation and Amortization, to your individual income tax return to claim the depreciation.
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I purchased a rental property last year. What closing costs can I deduct?
Settlement fees and closing costs 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.
For additional information refer to Publication 527, Residential Rental Property.
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I own a duplex. I live on one side and rent out the other. Is my mortgage interest and property taxes fully deductible on Schedule E?
No. Only the mortgage interest and property taxes for the portion you are renting are deductible on Form 1040, SCHEDULE E, Supplemental Income and Loss. If you receive one bill, you should prorate the rental portion based on square footage. Your portion can be deducted on Form 1040, SCHEDULE A, Itemized Deductions, if you can itemize. Refer to Publication 527, Residential Rental Property, for more information and the Instructions for Form 1040, Schedule E, Supplemental Income and Loss.
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Can you deduct Private Mortgage Insurance (PMI) premiums on rental property? If so, which line item on Schedule E?
Yes. Deduct it on line 9 of Form 1040, SCHEDULE E, Supplemental Income and Loss. Write "PMI" on the dotted line.
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Where on Schedule E do you put costs paid (points, fees, etc.) to refinance a rental property?
Expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. You can amortize them over the life of the mortgage on line 18 of Form 1040, SCHEDULE E, Supplemental Income and Loss.
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I have losses from a passive rental real estate activity in which I actively participate. Can I offset the losses against my nonpassive income?
If your rental of real estate is a passive activity, you may generally offset a loss of up to $25,000 against your nonpassive income if you actively participate in the activity. However, married persons filing separate returns who lived together at any time during the year may not claim this offset. Married persons filing separate returns who lived apart at all times during the year are each allowed a $12,500 maximum offset for passive real estate activities. For additional information on limits on rental losses, refer to Chapter 10 of Publication 17, Your Federal Income Tax, and Tax Topic 425, Passive Activities - Losses and Credits.
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I received income for renting out my timeshare for a week. I understand that I don't have to report income from any rental less that 14 days, but the property management company reported that income to the IRS. Do I have to report it when I file?
If you use the dwelling unit as a home and you rent it for fewer than 15 days during the year, do not include any of the rent in your income and do not deduct any of the rental expenses. If you do not meet the tests for using your timeshare as your home, the income is reportable on Form 1040, SCHEDULE E, Supplemental Income and Loss.
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I rent my home out for two weeks each year. Do I have to show the income on my return?
If you use a dwelling as a home and rent it for fewer than 15 days during the year, do not report any of the rental income and do not deduct any expenses as rental expenses. In this case, you may deduct some expenses on Form 1040, SCHEDULE A, such as mortgage interest, property taxes, and any casualty losses. For additional information, refer to Tax Topic 415, Renting Vacation Property/Renting to Relatives.
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I am renting a house to my son and daughter-in-law. Can I claim rental expenses?
If you receive income from the rental of a dwelling unit, such as a house or apartment, there are certain expenses you may deduct. These expenses reduce the amount of rental income that is taxed. However, if you also use the dwelling unit as a home, or rent it at less than fair rental value, certain restrictions apply to the deduction of your rental expenses. Refer to Tax Topic 414, Rental Income and Expenses, Tax Topic 415, Renting Vacation Property/Renting to Relatives, or Publication 527, Residential Rental Property, for more information on what expenses you are able to deduct.
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What form(s) do we need to fill out to report the sale of rental property?
The gain or loss on the sale of rental property is reported on Form 4797, Sale of Business Property.
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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 rental property, you are required to make an adjustment to your basis for allowable depreciation regardless to whether or not it was taken. For more information refer to Publication 544, Sale or Other Dispositions of Assets, and the Instructions for Form 4797, Sales of Business Property.
You may want to amend your income tax returns using Form 1040X, Amended U.S. Individual Income Tax Return. However, you may only amend your return three years from the later of the due date of the return or the date the return was filed.
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I am selling my rental property and was asked to pay the buyer's closing costs. Is all or part of the costs deductible for me?
In computing your gain or loss on the sale, reduce your proceeds from the sale by your selling expenses, including the buyer's closing costs that you agree to pay. Refer to Publication 544, Sales and Other Dispositions of Assets, for additional information.
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How do I file the gain on an installment sale of business property in each year? What form do I use?
Use Form 6252, Installment Sale Income, to figure your installment sale income each year. You may also need Form 1040, SCHEDULE D, Capital Gains and Losses and Form 4797, Sales of Business Property. For additional information including forms and instructions, refer to Publication 537, Installment Sales
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What forms do we file to report a loss on the sale of a rental property?
The gain or loss on the sale of rental property is reported on Form 4797, Sale of Business Property.
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I sold a rental property in which I had previous years' loss carryovers due to the loss limitation rules. Can I recover the total carryover since the property has been disposed of?
Yes. Claim the expenses limited for that property in prior years on Form 1040, SCHEDULE E, Supplemental Income and Loss.
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Can you sell rental property and reinvest it into rental property without paying capital gains tax?
Unless you exchange properties in a qualifying like-kind exchange, you may not defer the gain on the sale of your rental property by purchasing replacement property. For additional information on like-kind exchanges, refer to Publication 544, Sales and Other Dispositions of Assets.
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I have heard that I can sell my rental property and use the proceeds to purchase rental property of greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?
What you have heard about is a like-kind exchange. Like-kind exchanges are subject to several rules and restrictions listed in Publication 544, Sales and Other Dispositions of Assets.
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We sold a rental property last year and used the 1031 Tax Deferred Exchange law to defer the gains into another like-kind property. How do I handle this transaction on my tax return?
Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.
If you have any taxable gain because you received money or unlike property, report it on Form 4797, Sales of Business Property, and Form 1040, SCHEDULE D, Capital Gains and Losses. Refer to Publication 544, Sales and Other Dispositions of Assets, which has a detailed section on like-kind exchanges.
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Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?
You may be able to exclude your gain from the sale of a home that you have also used for business or to produce rental income if you meet the ownership and use tests.
However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is the smaller of these two figures.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, SCHEDULE D, Capital Gains or Losses, as described in Publication 523, Selling Your Home.
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I just sold a commercial rental property my wife and I had purchased thirty years ago before she passed away and I want to know how to figure my cost basis. Is it the full appraised value at the time of her death, or is it just half?
The answer depends on which state you live in. The basis of property you inherit is usually the fair market value at the date of the decedent's death. If you live in a community property state, the basis for the entire property becomes the fair market value at the date of death. If you are in a non-community property state, the one-half that your wife owned would be increased to the fair market value at the date of her death. The basis in the one-half that you owned would remain at your original one-half cost.
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