Using the Optional Tables
You can use the tables in Table 10-3 to compute annual depreciation under MACRS. The tables show the percentages for the first 6
years. The percentages in Tables 10-3-A, 10-3-B, and 10-3-C make the change from declining balance to straight
line in the year that straight line will yield an equal or larger deduction. See Appendix A of Publication 946 for complete tables.
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.
Figure any special depreciation allowance on qualified property before using Table 4-A, 4-B and 4-C, or the
5-, 7-, or 15-year property 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 in MACRS Depreciation Under GDS in Publication 527.
Tables 10-3-A, 10-3-B, and 10-3-C.
The percentages in these tables take into account the half-year and mid-quarter conventions. Use Table 10-3-A for 5-year
property, Table 10-3-B for 7-year property, and Table 10-3-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 $429 and your basis in the refrigerator
is $714. After figuring the special depreciation allowance 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 10-3-A, you find the depreciation percentage for year 1 is 20%. For
that year, your depreciation deduction is $60 ($300 × .20) for the stove and $100 ($500 × .20) for the refrigerator.
For year 2, you find your depreciation percentage is 32%. That year's depreciation deduction will be $96 ($300 × .32) for the stove and $160
($500 × .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 ($714) is more than 40% of the total basis of all property placed in service during the year ($1,143 × .40 = $457).
Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 10-3-A and find that
the depreciation percentage for year 1 is 5%. Your depreciation deduction for the refrigerator (after figuring the special depreciation allowance) is
$25 ($500 × .05).
Because you placed the stove in service in February, you use the first quarter column of Table 10-3-A and find that the
depreciation percentage for year 1 is 35%. For that year, your depreciation deduction for the stove (after figuring the special depreciation
allowance) is $105 ($300 × .35).
Table 10-3-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 $160,000. Using Table
10-3-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 $5,091 ($160,000 × .03182).
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 10-2 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. Under ADS, personal property with
no class life is depreciated using a recovery period of 12 years and real property with no class life is depreciated using a recovery period of 40
years.
Use the mid-month convention for residential rental property and nonresidential real property. For all other property, use the half-year or
mid-quarter convention.
Election.
For property placed in service during 2002, you choose to use ADS by entering the depreciation on line 20, Part III 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 and nonresidential real property.
Once you choose to use ADS, you cannot change your election.
Other Rules About Depreciable Property
In addition to the rules about what methods you can use, there are other rules you should be aware of with respect to depreciable property.
Gain from disposition.
If you dispose of depreciable property at a gain, you may have to report, as ordinary income, all or part of the gain. See Publication 544,
Sales and Other Dispositions of Assets.
Alternative minimum tax.
If you use accelerated depreciation, you may have to file Form 6251. 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.
Limits on Rental Losses
Rental real estate activities are generally considered passive activities, and the amount of loss you can deduct is limited. Generally, you cannot
deduct losses from rental real estate activities unless you have income from other passive activities. However, you may be able to deduct rental
losses without regard to whether you have income from other passive activities if you materially or actively participated in your rental
activity. See Passive Activity Limits, later.
Losses from passive activities are first subject to the at-risk rules. At-risk rules limit the amount of deductible losses from holding most real
property placed in service after 1986.
Exception.
If your rental losses are less than $25,000 and you actively participated in the rental activity, the passive activity limits probably do not apply
to you. See Losses From Rental Real Estate Activities, later.
Property used as a home.
If you used the rental property as a home during the year, the passive activity rules do not apply to that home. Instead, you must follow the rules
explained earlier under Personal Use of Dwelling Unit (Including Vacation Home.)
At-Risk Rules
The at-risk rules place a limit on the amount you can deduct as losses from activities often described as tax shelters. Losses from holding real
property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules.
Generally, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the
activity at the end of the tax year. You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you
contributed to the activity and certain amounts borrowed for use in the activity. See Publication 925 for more information.
Passive Activity Limits
In general, all rental activities (except those meeting the exception for real estate professionals, below) are passive activities. For this
purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services.
Limits on passive activity deductions and credits.
Deductions for losses from passive activities are limited. You generally cannot offset income, other than passive income, with losses from passive
activities. Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Any excess loss or credit
is carried forward to the next tax year.
For a detailed discussion of these rules, see Publication 925.
You may have to complete
Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and
the amount of the passive activity loss allowed on your tax return.
Exception for real estate professionals.
Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real
estate professional because you met the requirements. For a detailed discussion of the requirements, see Publication 527. For a detailed discussion of
material participation, see Publication 925.
Losses From Rental Real Estate Activities
If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the
activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive
activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any
losses allowed under this exception.
If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than
$12,500. If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce
your nonpassive income or tax on nonpassive income.
The maximum amount of the special allowance is reduced if your modified adjusted gross income is more than $100,000 ($50,000 if married filing
separately).
Active participation.
You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made
management decisions in a significant and bona fide sense. Management decisions include approving new tenants, deciding on rental terms, approving
expenditures, and similar decisions.
More information.
See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and
credits and the treatment of gains and losses realized on the disposition of a passive activity.
How To Report Rental Income and Expenses
If you rent buildings, rooms, or apartments, and provide only heat and light, trash collection, etc., you normally report your rental income and
expenses in Part I of Schedule E (Form 1040). However, do not use that schedule to report a not-for-profit activity. See Not Rented for
Profit, earlier.
If you provide significant services that are primarily for your tenant's convenience, such as regular cleaning, changing
linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business or Schedule
C-EZ, Net Profit From Business (Sole Proprietorship). Significant services do not include the furnishing of heat and light, cleaning
of public areas, trash collection, etc. For information, see Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or
C-EZ). You also may have to pay self-employment tax on your rental income. See Publication 533, Self-Employment Tax.
Form 1098.
If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, Mortgage Interest
Statement, or similar statement showing the interest you paid for the year. If you and at least one other person (other than your spouse if you
file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the
interest on line 13 of Schedule E (Form 1040). Attach a statement to your return showing the name and address of the other person. In the left margin
of Schedule E (Form 1040), next to line 13, write See attached.
Schedule E (Form 1040)
Use Part I of Schedule E (Form 1040) to report your rental income and expenses. List your total income, expenses, and depreciation for each rental
property. Be sure to answer the question on line 2.
If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Complete
lines 1 and 2 for each property. However, fill in the Totals column on only one Schedule E. The figures in the Totals column on that
Schedule E should be the combined totals of all Schedules E.
Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment
conduits. If you need to use page 2 of Schedule E, use page 2 of the same Schedule E you used to enter the combined totals in Part I.
On page 1, line 20 of Schedule E, enter the depreciation you are claiming. You must complete and attach Form 4562 for
rental activities only if you are claiming:
- Depreciation on property placed in service during 2002,
- Depreciation on any property that is listed property (such as a car), regardless of when it was placed in service, or
- Any car expenses (actual or the standard mileage rate).
Otherwise, figure your depreciation on your own worksheet. You do not have to attach these computations to your return.
Example.
On January 1, Justin Cole bought a townhouse and placed it in service as residential rental property. He receives $1,100 a month rental income. His
rental expenses for the year are as follows:
| Fire insurance (1-year policy) |
$200 |
| Mortgage interest |
5,000 |
| Fee paid to real estate company for collecting monthly rent |
572 |
| General repairs |
175 |
| Real estate taxes imposed and paid |
800 |
Justin's basis for depreciation of the townhouse is $65,000. He is using MACRS with a 27.5-year recovery period. On April 1, Justin bought a new
refrigerator for the rental property at a cost of $725. He uses the MACRS method with a 5-year recovery period. The dishwasher qualifies for the
special depreciation allowance which he figures first.
Justin uses the percentage for January in Table 10-3-D to figure his depreciation deduction for the townhouse. He uses the
percentage under Half-year convention in Table 10-3-A to figure his depreciation deduction for the refrigerator. He must
report the depreciation on Form 4562.
Justin figures his net rental income or loss for the townhouse as follows:
| Total rental income received |
|
|
| ($1,100 × 12) |
|
$13,200 |
| Minus Expenses: |
|
|
| Fire insurance (1-year policy) |
200 |
|
| Mortgage interest |
5,000 |
|
| Rent collection fee |
572 |
|
| General repairs |
175 |
|
| Real estate taxes |
800 |
|
| Total expenses |
|
6,747 |
| Balance |
|
$6,453 |
| Minus Depreciation: |
|
|
| Townhouse ($65,000 × 3.485%) |
2,265 |
|
| Refrigerator-special allowance ($725 × 30%) |
218 |
|
| Refrigerator ($725 - $218 special allowance × 20%) |
101 |
|
| Total depreciation |
|
2,584 |
| Net rental income for townhouse |
|
$3,869 |
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