2010 Rental Property Depreciation Expense Information from IRS for Landlords, Real Estate Investors

by Property Management Software on February 26, 2010

Rental Property Tax Deduction Depreciation

Rental Property Tax Deduction Depreciation

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You recover the cost of income producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.

Three basic factors determine how much depreciation you can deduct: (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, or the cost of furniture, fixtures and equipment, 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 Which Forms To Use in chapter 3. Also see Publication 946.

Section 179 deduction. The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. This deduction is not allowed for property used in connection with residential rental property. See chapter 2 of Publication 946.

Alternative minimum tax (AMT). Using a method of accelerated depreciation may affect your being subject to the alternative minimum tax. Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year).

The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting).

To find out if you are subject to the AMT, see the Instructions for Form 6251, Alternative Minimum Tax—Individuals.

The Basics

The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction.

What Rental Property Can Be Depreciated?

You can depreciate your property if it meets all the following requirements.

  • You own the property.
  • You use the property in your business or income-producing activity (such as rental property).
  • The property has a determinable useful life.
  • The property is expected to last more than 1 year.

Property you own. To claim depreciation, you usually must be the owner of the property. You are considered as owning property even if it is subject to a debt.

Rented property. Generally, if you pay rent for property, you cannot depreciate that property. Usually, only the owner can depreciate it. However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. See Additions or improvements to property, later in this chapter, under Recovery Periods Under GDS.

Cooperative apartments. If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. See chapter 4.

Property having a determinable useful life. To be depreciable, your property must have a determinable useful life. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.

What Rental Property Cannot Be Depreciated?

Certain property cannot be depreciated. This includes land and certain excepted property.

Land. You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. But if it does, the loss is accounted for upon disposition. The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated.

Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property.

Example.

You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. If you replace the house, you would have to destroy the bushes and trees right next to it. These bushes and trees are closely associated with the house, so they have a determinable useful life. Therefore, you can depreciate them. Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them.

Excepted property. Even if the property meets all the requirements listed on this page under What Rental Property Can Be Depreciated, you cannot depreciate the following property.

  • Property placed in service and disposed of (or taken out of business use) in the same year.
  • Equipment used to build capital improvements. You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements.

For more information, see Publication 946, chapter 1.

When Does Depreciation Begin and End?

You begin to depreciate your rental property when you place it in service for the production of income. You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first.

Placed in Service

You place property in service in a rental activity when it is ready and available for a specific use in that activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.

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 installed and 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 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.

Conversion to business use. If you place property in service in a personal activity, you cannot claim depreciation. However, if you change the property’s use to business or the production of income, you can begin to depreciate it at the time of the change. You place the property in service for business or income-producing use on the date of the change.

Example.

You bought a home and used it as your personal home several years before you converted it to rental property. Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income.

Idle Property

Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent.

Cost or Other Basis Fully Recovered

You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. See Basis of Depreciable Property on this page.

Retired From Service

You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events.

  • You sell or exchange the property.
  • You convert the property to personal use.
  • You abandon the property.
  • The property is destroyed.

Depreciation Methods

Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986.

If you placed rental property in service before 1987, you are using one of the following methods.

  • ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987.
  • Straight line or declining balance method over the useful life of property placed in service before 1981.

Rental property placed in service before 2009. Continue to use the same method of figuring depreciation that you used in the past.

Use of real property changed. Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. This includes your residence that you changed to rental use. See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed.

Improvements made after 1986. Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. For more information about improvements, see Additions or improvements to property, later in this chapter under Recovery Periods Under GDS.

This publication discusses MACRS depreciation only. If you need information about depreciating property placed in service before 1987, see Publication 534.

Basis of Depreciable Property

The 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.

If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property.

Basis and adjusted basis are explained in the following discussions.

If you used the property for personal purposes before changing it to rental use, its basis for depreciation 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 in chapter 4.

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 (but see Exception below),
  • Freight charges to obtain the property, and
  • Installation and testing charges.

Exception. if you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. Such taxes were deductible before 1987 and after 2003.

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 (OID) 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 does 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 your basis in the property.

Settlement fees and other costs. The following settlement fees and closing costs that are for buying the property are part of your basis in the property.

  • Abstract fees.
  • Charges for installing utility services.
  • Legal fees.
  • Recording fees.
  • Surveys.
  • Transfer taxes.
  • Title insurance.
  • 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.

The following are settlement fees and closing costs you cannot include in your basis in the property.

  1. Fire insurance premiums.
  2. Rent or other charges relating to occupancy of the property before closing.
  3. Charges connected with getting or refinancing a loan, such as:
    1. Points (discount points, loan origination fees),
    2. Mortgage insurance premiums,
    3. Loan assumption fees,
    4. Cost of a credit report, and
    5. 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 remaining to 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.

Separating cost of 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 their assessed values for real estate tax purposes.

Example.

You buy a house and land for $200,000. 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 $160,000, of which $136,000 was for the house and $24,000 was for the land.

You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land.

Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000).

Basis Other Than Cost

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

To figure your property’s basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. 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. These include the following.

  • The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year.
  • Amounts spent after a casualty to restore the damaged property.
  • The cost of extending utility service lines to the property.
  • Legal fees, such as the cost of defending and perfecting title, or settling zoning issues.

Additions or improvements. Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. This includes all direct costs, such as material and labor, but not your own labor. It also includes all expenses related to the addition or 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 additions or improvements made after you place the property in service in your rental activity. For information on depreciating additions or improvements, see Additions or improvements to property, later in this chapter, 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. However, see What Rental Property Cannot 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 its cost, 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.

However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Do not add them to your basis in the property.

Deducting vs. capitalizing costs. Do not add to your basis costs you can deduct 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 capitalize include carrying charges, such as interest and taxes, that you must pay to own property.

For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7.

Decreases to basis. You must decrease the basis of your property by any items that represent a return of your cost. These include the following.

  • Insurance or other payment you receive as the result of a casualty or theft loss.
  • Casualty loss not covered by insurance for which you took a deduction.
  • Amount(s) you receive for granting an easement.
  • Residential energy credit you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home.
  • Exclusion from income of subsidies for energy conservation measures.
  • Special depreciation allowance claimed on qualified property.
  • Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551.

If your rental property was previously used as your main home, you must also decrease the basis by the following.

  • Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property.
  • District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997.
  • Amount of qualified principal residence indebtedness discharged on or after January 1, 2007.

Claiming the Special Depreciation Allowance

For 2009, your residential rental property may qualify for a special 30% or 50% depreciation allowance. This allowance is figured before you figure your regular depreciation deduction.

Among other qualifications, this property must be located in the New York Liberty Zone, the Gulf Opportunity Zone, the Kansas disaster area, or other federally declared disaster areas. See Publication 946, chapter 3, for details. Also see the Instructions for Form 4562, Line 14.

If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14.

MACRS Depreciation

Most business and investment property placed in service after 1986 is depreciated using MACRS.

This section explains how to determine which MACRS depreciation system applies to your property. It also discusses other information you need to know before you can figure depreciation under MACRS. This information includes the property’s:

  • Recovery class,
  • Applicable recovery period,
  • Convention,
  • Placed-in-service date,
  • Basis for depreciation, and
  • Depreciation method.

Depreciation Systems

MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally, you must use GDS for property used in most rental activities, unless you elect ADS.

Excluded Property

You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2009 if it had been previously placed in service before 1987 when 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 2009 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1.

Electing ADS

If you choose, you can use the ADS method for most property. Under ADS, you use the straight line method of depreciation.

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.

For property placed in service during 2009, you elect to use ADS by entering the depreciation on Form 4562, Part III, line 20.

Once you elect to use ADS, you cannot change your election.

Property Classes Under GDS

Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. The property class generally determines the depreciation method, recovery period, and convention. The property classes under GDS 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.

Under MACRS, property that you placed in service during 2009 in your rental activities generally falls into one of the following classes.

  • 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 residential rental real estate activity.

Depreciation on automobiles, certain computers, and cellular telephones is limited. See chapter 5 of Publication 946.

  • 7-year property. This class includes office furniture and equipment (desks, file cabinets, 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, fences, 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. 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.

The other property 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.

Recovery Periods Under GDS

The recovery period of property is the number of years over which you recover its cost or other basis. The recovery periods are generally longer under ADS than GDS.

The recovery period of property depends on its property class. Under GDS, the recovery period of an asset is generally the same as its property class.

Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. See Table 2-1 for recovery periods of property commonly used in residential rental activities.

Qualified Indian reservation property. Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. For more information, see chapter 4 of Publication 946.

Additions or improvements to property. Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes.

The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement.

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.

Example.

You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. You built an addition onto the house and placed it in service in 2009. You must use MACRS for the addition. Under GDS, the addition is depreciated as residential rental property over 27.5 years.

Table 2-1.MACRS Recovery Periods for Property Used in Rental Activities

MACRS Recovery Period

Type of Property

General
Depreciation
System

Alternative
Depreciation
System

Computers and their peripheral equipment

5 years

5 years

Office machinery, such as:
Typewriters
Calculators
Copiers

5 years 6 years

Automobiles

5 years

5 years

Light trucks

5 years

5 years

Appliances, such as:
Stoves
Refrigerators

5 years

9 years

Carpets

5 years

9 years

Furniture used in rental property

5 years

9 years

Office furniture and equipment, such as:
Desks
Files

7 years

10 years

Any property that does not have a class life and that has not
been designated by law as being in any other class

7 years

12 years

Roads

15 years

20 years

Shrubbery

15 years

20 years

Fences

15 years

20 years

Residential rental property (buildings or structures)
and structural components such as furnaces,
waterpipes, venting, etc.

27.5 years

40 years

Additions and improvements, such as a new roof

The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement.

Conventions

A convention is a method established under MACRS to set the beginning and end of the recovery period. The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property.

Mid-month convention. A mid-month convention is used for all residential rental property and nonresidential real property. Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month.

Mid-quarter convention. A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year.

Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter.

Example.

During the tax year, Tom Martin purchased the following items to use in his rental property. He elects not to claim the special depreciation allowance, discussed earlier.

  • 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 $800 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 $1,300. The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Tom must use the mid-quarter convention instead of the half-year convention for all three items.

Half-year convention. The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year.

If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery period.

Figuring Your Depreciation Deduction

You can figure your MACRS depreciation deduction in one of two ways. The deduction is substantially the same both ways. 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 MACRS percentage tables, shown later.

In this publication we will use the percentage tables. For instructions on how to compute the deduction, see chapter 4 of Publication 946.

Residential rental property. You must use the straight line method and a mid-month convention for residential rental property. In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions, earlier on this page).

5-, 7-, or 15-year property. For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. However, in limited cases you must use the mid-quarter convention, if it applies. 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 Part III, column (f), enter “150 DB.” Once you make this election, you cannot change to another method.

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 an equal or 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 Part III, column (f), enter “S/L.” Once you make this election, you cannot change to another method.

MACRS Percentage Tables

You can use the percentages in Table 2-2 (on the next page) to compute annual depreciation under MACRS. The tables show the percentages for the first few years or until the change to the straight line method is made. See Appendix A of Publication 946 for complete tables. The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction.

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 percentage tables. You must apply the table rates to your property’s unadjusted basis (defined below) each year of the recovery period.

Once you begin using a percentage 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:

  1. Depreciation allowed or allowable, or
  2. An addition or improvement that is depreciated as a separate item of property.

If there is an adjustment for any reason other than (1) or (2), 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 on this page under Figuring Your Depreciation Deduction. See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4.

Unadjusted basis. This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years.

However, you do reduce your original basis by other amounts claimed on the property, including:

  • Any amortization,
  • Any section 179 deduction, and
  • Any special depreciation allowance.

For more information, see Publication 946, chapter 4.

Table 2-2

Tables 2-2a, 2-2b, and 2-2c. The percentages in these tables take into account the half-year and mid-quarter conventions. Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Use the percentage in the second column (half-year convention) unless you are required to 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 June. Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Both are 5-year property. Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. For that year your depreciation deduction is $120 ($600 × .20) for the stove and $200 ($1,000 × .20) for the refrigerator.

For Year 2, the depreciation percentage is 32%. That year’s depreciation deduction will be $192 ($600 × .32) for the stove and $320 ($1,000 × .32) for the refrigerator.

Example 2.

Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × .40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator.

Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. Your depreciation deduction for the refrigerator is $50 ($1,000 × .05).

Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. For that year, your depreciation deduction for the stove is $150 ($600 × .25).

Table 2-2d. 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. Continue to use the same row (month) under the column for the appropriate year.

Example.

You purchased a single family rental house for $185,000 and placed it in service on February 8. The sales contract showed that the building cost $160,000 and the land cost $25,000. Your basis for depreciation is its original cost, $160,000. Using Table 2-2d, 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).

Figuring MACRS Depreciation Under ADS

Table 2-1, earlier, shows the ADS recovery periods for property used in rental activities.

See Appendix B in Publication 946 for other property. If your property is not listed in Appendix B, 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.

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, as appropriate.

Claiming the Correct Amount of Depreciation

You should claim the correct amount of depreciation each tax year. If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. For more information, see Depreciation under Decreases to Basis in Publication 551.

If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction 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.

Filing an amended return. You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations.

  • You claimed the incorrect amount because of a mathematical error made in any year.
  • You claimed the incorrect amount because of a posting error made in any year.
  • You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003.
  • You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003.

Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns.

If an amended return is allowed, you must file it by the later of the following dates.

  • 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. A return filed before an unextended due date is considered filed on that due date.
  • 2 years from the time you paid your tax for that year.

Changing your accounting method. To change your accounting method, you generally 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, chapter 1.

Source:  IRS 2009 Publication 527

This blog post for Real Estate Professionals, Investors, Landlord, Property Manager, and Property Management Companies is brought to you by SimplifyEm Pay Rent Online and Property Management Software

{ 3 comments… read them below or add one }

Ed Furey March 14, 2010 at 1:54 pm

I recently posted this calculator for residential rental or nonresidential real property related to IRS form 4562 lines 19 and 20. It uses MM (mid month convention) and S/L (straight-line depreciation) and will create a schedule. It is built to specifically handle the mid month convention.
http://www.calculatorsoup.com/calculators/financial/depreciation-property-realestate.php

I hope it is useful. I appreciate feedback.

From my research I assume that other property can be depreciated using the other standard depreciation calculators however, any suggestions for specific calculators are welcome.

Reply

Property Management Software March 15, 2010 at 11:38 am

Thanks Ed!

Reply

Patricia Harrison January 13, 2013 at 10:35 pm

Hi Dear,

Nice software I like it.

Thanks,
Patricia Harrison

Reply

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