Publication 534: Depreciating Property Placed in Service Before 1987; Accelerated Cost Recovery System (ACRS)

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The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. If you placed property in service during this period, you must continue to figure your depreciation under ACRS.

If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. Listed property includes cars, other means of transportation, and certain computers.

Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc.), are depreciated using MACRS, discussed in chapter 3 of Publication 946. It does not matter that the underlying property is depreciated under ACRS or one of the other methods.

ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. The alternate ACRS method used a recovery percentage based on a modified straight line method. The law prescribes fixed percentages to be uses for each class of property.

Property depreciable under ACRS is called recovery property. The recovery class of property determines the recovery period. Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class.

Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property.

You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946.

ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. It includes new or used and real or personal property. The property must be for use in a trade or business or for the production of income. Property you acquired before 1981 or after 1986 is not ACRS recovery property. For information on depreciating property acquired before 1981, see chapter 2. For information on depreciating property acquired after 1986, see chapter 3 of Publication 946.

Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income.

You cannot use ACRS for property you placed in service before 1981 or after 1986. Nonrecovery property also includes:

Intangible property.

Intangible property is not depreciated under ACRS.

Property depreciated under methods not expressed in a term of years.

Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. This included any property:

If you made an irrevocable election to exclude such property, and
In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method).

Public utility property.

Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule.

Additions or improvements to ACRS property after 1986.

Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc.) are depreciated using MACRS, discussed in chapter 3 of Publication 946. It does not matter that the underlying property is depreciated under ACRS or one of the other methods.

After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. Because the conventions are built into the percentage table rates, you only need to know the following:

To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946.

If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. See Publication 551.

All recovery property under ACRS is in one of the following classes. The class for your property was determined when you began to depreciate it.

3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. Race horses over 2 years old when placed in service are 3-year property. Any other horses over 12 years old when you placed them in service are also included in the 3-year property class.

If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. You cannot claim depreciation for this property after 1988.

5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components).

If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. You cannot claim depreciation for this property after 1990.

10-year property includes certain real property such as theme-park structures and certain public utility property. Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property.

You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property.

If you used the percentages above, you cannot claim depreciation for this property after 1995.

Example.

On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Your ACRS deduction was $3,000 (8% × $37,500). In 1987, your ACRS deduction was $5,250 (14% × $37,500). In 1988, your ACRS deduction was $4,500 (12% × $37,500). In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500).

15-year real property is real property that is recovery property placed in service before March 16, 1984. It includes all real property, such as buildings, other than that designated as 5-year or 10-year property.

Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. You could group 15-year real property by month and year placed in service.

In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year.

Example.

On March 5, 1984, you placed an apartment building in service in your business. It is 15-year real property. After subtracting the value of the land, your unadjusted basis in the building is $250,000. You use the calendar year as your tax year. March is the third month of your tax year. Your ACRS deduction for 1984 was $25,000 (10% × $250,000). For 1985, the percentage for the third month of the second year of the recovery period is 11%. Your deduction was $27,500 (11% × $250,000). For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. For 1989 through 1992, the percentage for the third month is 6%. Your deduction each year is $15,000 (6% × $250,000). For 1993, 1994, and 1995, the percentage for the third month is 5%. Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995.

Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property:

Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws.
Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed.
Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families.
Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949.

The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Use the percentages listed under that month for each year of the recovery period. Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987.

Example.

In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. You use the calendar year as your tax year. You use Table C–3 because the property was placed in service after May 8, 1985. Your unadjusted basis for the property, not including the land, was $59,000.

Your deduction for 1986 through 2001 is shown in the following table.

Year	Rate	Deduction
1986	8.9%	$5,251
1987	12.1%	7,139
1988	10.5%	6,195
1989	9.1%	5,369
1990	7.9%	4,661
1991	6.9%	4,071
1992	5.9%	3,481
1993	5.2%	3,068
1994	4.6%	2,714
1995	4.6%	2,714
1996	4.6%	2,714
1997	4.6%	2,714
1998	4.6%	2,714
1999	4.5%	2,655
2000	4.5%	2,655
2001	1.5%	885

18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing.

The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. There are also tables for 18-year real property in the Appendix. Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984.

Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. Use the percentages listed under that month for each year of the recovery period.

Example.

On April 28, 1985, you bought and placed in service a rental house. The house, not including the land, cost $95,000. This is your unadjusted basis for the house. You use the calendar year as your tax year. Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. You use Table 4 to figure your deduction for the house. April is the fourth month of your tax year. Your deduction for 1985 through 2003 is shown in the following table.

Year	Rate	Deduction
1985	7.0%	$6,650
1986	9.0%	8,550
1987	8.0%	7,600
1988	7.0%	6,650
1989	7.0%	6,650
1990	6.0%	5,700
1991	5.0%	4,750
1992	5.0%	4,750
1993	5.0%	4,750
1994	5.0%	4,750
1995	5.0%	4,750
1996	5.0%	4,750
1997	5.0%	4,750
1998	4.0%	3,800
1999	4.0%	3,800
2000	4.0%	3,800
2001	4.0%	3,800
2002	4.0%	3,800
2003	1.0%	950

19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing.

The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. Table 6 shows the percentages for 19-year real property.

You find the month in your tax year that you placed the property in service. You use the percentages listed under that month for each year of the recovery period.

Each item of recovery property is assigned to a class of property. The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. The classes of property are:

ACRS provides an alternate ACRS method that could be elected. This alternate ACRS method uses a recovery percentage based on a modified straight line method.

This alternate ACRS method generally uses percentages other than those from the tables. If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. This schedule is for other than 18- and 19-year real property and low-income housing:

Percentages.

The straight-line percentages for the alternate ACRS method are:

Recovery Period		Percentage
5 years		20.00%
10 years		10.00%
12 years		8.333%
15 years		6.667%
25 years		4.00%
35 years		2.857%

You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. There are tables for 18- and 19-year real property later in this publication in the Appendix. For 15-year real property, see 15-year real property, later.

3-, 5-, and 10-year property.

If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. This applies throughout the recovery period you selected.

Half-year convention.

If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. This applied regardless of when in the tax year you placed the property in service. For each of the remaining years in the recovery period, you take a full year's deduction. If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period.

Example.

You operate a small upholstery business. On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. You elected to use the alternate ACRS method. You did not elect to take a section 179 deduction. You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. The saw is 5-year property, but you decided to recover its cost over 12 years.

For 1986, your ACRS deduction reflected the half-year convention. In the first year, you deducted half of the amount determined for a full year. Your ACRS deduction for 1986 is as follows:

Light-duty truck
5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600=		$1,300.00

Electric saw
12 years straight line = 8.333% 8.333% ÷ $500 = $41.67 Half-year convention -½ of $41.67=		20.84
Total ACRS deduction for 1986		$1,320.84

You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Your ACRS deduction for each of those years is as follows:

Light-duty truck
5 years straight line = 20% 20% ÷ $13,000 =		$2,600

Electric saw
12 years straight line = 8.333% 8.333% ÷ $500 =		$41.67
Total annual ACRS deduction for 1987 through 1990		$2,641.67

In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. Your ACRS deduction for 1991 is as follows:

Light-duty truck
5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600=		$1,300.00

Electric saw
12 years straight line = 8.333% 8.333% ÷ $500 =		$41.67
Total ACRS deduction for 1991		$1,341.67

The truck is fully depreciated after 1991. You take a full year of depreciation for the saw for the years 1992 through 1997. Your ACRS deduction for each of those years is as follows:

Electric saw
12 years straight line = 8.333% 8.333% ÷ $500 =		$41.67
Total annual ACRS deduction for 1992 through 1997		$41.67

You take a half-year of depreciation for the saw for 1998. Your ACRS deduction for 1998 is as follows:

Electric saw
12 years straight line = 8.333% 8.333% ÷ $500 =		$41.67
Half-year convention -½ of $41.67=		20.84
Total ACRS deduction for 1998		$20.84

The saw is fully depreciated after 1998.

15-year real property.

Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. If you selected a 15-year recovery period, you use the percentage (6.667%) from the schedule above. You prorate this percentage for the number of months the property was in service in the first year. If you selected a 35- or 45-year recovery period, you use either Table 11 or 15.

Alternate periods for 18-year real property.

For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. There are two tables for each alternate recovery period. One table shows the percentage for property placed in service after June 22, 1984. The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984.

Alternate periods for 19-year real property.

For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. If you selected a 19-year recovery period, use Table 9 to determine your deduction. If you select a 35- or 45-year recovery period, use either Table 13 or 14.

Example.

You placed in service an apartment building on August 3, 1986. The building is 19-year real property. The sales contract allocated $300,000 to the building and $100,000 to the land. You use the calendar year as your tax year. You chose the alternate ACRS method over a recovery period of 35 years. For 1986, you figure your ACRS deduction usingTable 13. August is the eighth month of your tax year. The percentage from Table 13 for the eighth month is 1.1%. Your deduction was $3,300 ($300,000 ÷ 1.1%). The deduction rate from ACRS Table 13 for years 2 through 20 is 2.9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2.9%).

Alternate periods for low-income housing.

For low-income housing, the alternate recovery periods are 15, 35, or 45 years. If you selected a 15-year period for this property, use 6.667% as the percentage. If you selected a 35- or 45-year period, use either Table 11, 12, or 15.

Election.

You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service.

Revocation of election.

Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. The Commissioner grants consent only in extraordinary circumstances. Any request for a revocation will be considered a request for a ruling.

For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. Figure the amount of the ACRS deduction for a short tax year as follows:

The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12).

You use the full ACRS percentages during the remaining years of the recovery period. For the first tax year after the recovery period, the unrecovered basis will be deductible.

Exception.

For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. You compute the number of months using either a full month or mid-month convention. This is true regardless of the number of months in the tax year and the recovery period and method used.

A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction.

You generally recognize gain or loss on the disposition of an asset by sale. However, nonrecognition rules can allow you to postpone some gain. See Publication 544.

If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition.

Early dispositions.

The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved.

Early dispositions of ACRS property other than 15-, 18-, or 19-year real property.

Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property.

Dispositions — mass asset accounts.

The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. Examples of mass assets include minor items of office, plant, and store furniture and fixtures.

Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. You leave the unadjusted basis of the property in the account until recovered in future years. If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition.

Early dispositions — 15-year real property.

If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. You use a full-month convention. For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. This applies whether you use the regular ACRS method or elected the alternate ACRS method.

Example.

You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). You file your return based on a calendar year. Your rate from Table 1 for the third month is 10%. Your ACRS deduction for 1984 was $9,800 ($98.000 ÷ 10%). For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. For 1989 through 1992, you figured your ACRS deductions using 6% for each year. The deduction each year was $98,000 ÷ 6%. For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. You sell the house on June 1, 1995.

You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). You then prorate this amount to the 5 months in 1995 during which it was rented. Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12).

Early dispositions — 18- and 19-year real property.

If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. Count the month of disposition as half a month of use.

Example.

You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). You file your return based on a calendar year. Your rate from Table 4 for the seventh month is 4%. You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. You sell the house on September 24, 1995. Figure your ACRS deduction for 1995 for the months of use. The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). Prorate this amount for the 8.5 months in 1995 that you held the property. Under the mid-month convention, you count September as half a month. Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8.5/12).

If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Section 1245 property generally includes all personal property. See Section 1245 property in chapter 4 of Publication 544 for more information.

You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Section 1250 property includes most real property. See Section 1250 property in chapter 4 of Publication 544 for more information. This rule applies to all section 1250 real property except the following property:

For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation.

See Publication 544 for further discussion of dispositions of section 1245 and 1250 property.

Accelerated Cost Recovery System (ACRS)

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