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1040ez Tax Tables

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1040ez Tax Tables

1040ez tax tables 3. 1040ez tax tables   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). 1040ez tax tables There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. 1040ez tax tables There are also the limitations which may need to be applied if you have a net loss on Schedule E. 1040ez tax tables There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. 1040ez tax tables You may also have a gain or loss related to your rental property from a casualty or theft. 1040ez tax tables This is considered separately from the income and expense information you report on Schedule E. 1040ez tax tables Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). 1040ez tax tables However, do not use that schedule to report a not-for-profit activity. 1040ez tax tables See Not Rented for Profit , in chapter 4. 1040ez tax tables There are also other rental situations in which forms other than Schedule E would be used. 1040ez tax tables Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. 1040ez tax tables , you normally report your rental income and expenses on Schedule E, Part I. 1040ez tax tables List your total income, expenses, and depreciation for each rental property. 1040ez tax tables Be sure to enter the number of fair rental and personal use days on line 2. 1040ez tax tables If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. 1040ez tax tables Complete lines 1 and 2 for each property. 1040ez tax tables However, fill in lines 23a through 26 on only one Schedule E. 1040ez tax tables On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. 1040ez tax tables To find out if you need to attach Form 4562, see Form 4562 , later. 1040ez tax tables If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. 1040ez tax tables Form 6198, At-Risk Limitations. 1040ez tax tables See At-Risk Rules , later. 1040ez tax tables Also see Publication 925. 1040ez tax tables Form 8582, Passive Activity Loss Limitations. 1040ez tax tables See Passive Activity Limits , later. 1040ez tax tables Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. 1040ez tax tables If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. 1040ez tax tables Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). 1040ez tax tables Form 4562. 1040ez tax tables   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. 1040ez tax tables Otherwise, figure your depreciation on your own worksheet. 1040ez tax tables You do not have to attach these computations to your return, but you should keep them in your records for future reference. 1040ez tax tables   See Publication 946 for information on preparing Form 4562. 1040ez tax tables Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. 1040ez tax tables Providing substantial services. 1040ez tax tables   If you provide substantial 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 (Form 1040), Net Profit From Business. 1040ez tax tables Use Form 1065, U. 1040ez tax tables S. 1040ez tax tables Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). 1040ez tax tables Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. 1040ez tax tables For information, see Publication 334, Tax Guide for Small Business. 1040ez tax tables Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. 1040ez tax tables For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. 1040ez tax tables Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. 1040ez tax tables This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. 1040ez tax tables If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). 1040ez tax tables You will not be required to file Form 1065 for any year the election is in effect. 1040ez tax tables Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. 1040ez tax tables If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. 1040ez tax tables For more information on qualified joint ventures, go to IRS. 1040ez tax tables gov and enter “qualified joint venture” in the search box. 1040ez tax tables Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. 1040ez tax tables You must consider these rules in the order shown below. 1040ez tax tables Both are discussed in this section. 1040ez tax tables At-risk rules. 1040ez tax tables These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. 1040ez tax tables This applies only if the real property was placed in service after 1986. 1040ez tax tables Passive activity limits. 1040ez tax tables Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. 1040ez tax tables However, there are exceptions. 1040ez tax tables At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. 1040ez tax tables Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. 1040ez tax tables In most cases, 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. 1040ez tax tables 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. 1040ez tax tables Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. 1040ez tax tables See Publication 925 for a discussion of the at-risk rules. 1040ez tax tables Form 6198. 1040ez tax tables   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. 1040ez tax tables Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. 1040ez tax tables 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. 1040ez tax tables For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. 1040ez tax tables Deductions or losses from passive activities are limited. 1040ez tax tables You generally cannot offset income, other than passive income, with losses from passive activities. 1040ez tax tables Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. 1040ez tax tables Any excess loss or credit is carried forward to the next tax year. 1040ez tax tables Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. 1040ez tax tables For a detailed discussion of these rules, see Publication 925. 1040ez tax tables Real estate professionals. 1040ez tax tables   If you are a real estate professional, complete line 43 of Schedule E. 1040ez tax tables      You qualify as a real estate professional for the tax year if you meet both of the following requirements. 1040ez tax tables More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. 1040ez tax tables You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. 1040ez tax tables If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. 1040ez tax tables For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. 1040ez tax tables   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. 1040ez tax tables You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. 1040ez tax tables   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. 1040ez tax tables However, you can count your spouse's participation in an activity in determining if you materially participated. 1040ez tax tables Real property trades or businesses. 1040ez tax tables   A real property trade or business is a trade or business that does any of the following with real property. 1040ez tax tables Develops or redevelops it. 1040ez tax tables Constructs or reconstructs it. 1040ez tax tables Acquires it. 1040ez tax tables Converts it. 1040ez tax tables Rents or leases it. 1040ez tax tables Operates or manages it. 1040ez tax tables Brokers it. 1040ez tax tables Choice to treat all interests as one activity. 1040ez tax tables   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. 1040ez tax tables You can make this choice for any year that you qualify as a real estate professional. 1040ez tax tables If you forgo making the choice for one year, you can still make it for a later year. 1040ez tax tables   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. 1040ez tax tables This is true even if you are not a real estate professional in any intervening year. 1040ez tax tables (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. 1040ez tax tables )   See the Instructions for Schedule E for information about making this choice. 1040ez tax tables Material participation. 1040ez tax tables   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. 1040ez tax tables For details, see Publication 925 or the Instructions for Schedule C. 1040ez tax tables Participating spouse. 1040ez tax tables   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. 1040ez tax tables Do this even if your spouse owns no interest in the activity or files a separate return for the year. 1040ez tax tables Form 8582. 1040ez tax tables    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. 1040ez tax tables See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. 1040ez tax tables   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. 1040ez tax tables Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. 1040ez tax tables Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). 1040ez tax tables Exception for Rental Real Estate With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. 1040ez tax tables This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. 1040ez tax tables Similarly, you may be able to 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. 1040ez tax tables Example. 1040ez tax tables Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. 1040ez tax tables $2,000 of Jane's $3,500 loss offsets her passive income. 1040ez tax tables The remaining $1,500 loss can be deducted from her $40,000 wages. 1040ez tax tables The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. 1040ez tax tables Active participation. 1040ez tax tables   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 or arranged for others to provide services (such as repairs) in a significant and bona fide sense. 1040ez tax tables Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. 1040ez tax tables Example. 1040ez tax tables Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. 1040ez tax tables Mike had advertised and rented the house to the current tenant himself. 1040ez tax tables He also collected the rents, which usually came by mail. 1040ez tax tables All repairs were either made or contracted out by Mike. 1040ez tax tables Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. 1040ez tax tables Maximum special allowance. 1040ez tax tables   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. 1040ez tax tables   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. 1040ez tax tables If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. 1040ez tax tables   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. 1040ez tax tables Modified adjusted gross income (MAGI). 1040ez tax tables   This is your adjusted gross income from Form 1040, U. 1040ez tax tables S. 1040ez tax tables Individual Income Tax Return, line 38, or Form 1040NR, U. 1040ez tax tables S. 1040ez tax tables Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. 1040ez tax tables S. 1040ez tax tables savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). 1040ez tax tables Form 8582 not required. 1040ez tax tables   Do not complete Form 8582 if you meet all of the following conditions. 1040ez tax tables Your only passive activities were rental real estate activities in which you actively participated. 1040ez tax tables Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). 1040ez tax tables If married filing separately, you lived apart from your spouse all year. 1040ez tax tables You have no prior year unallowed losses from these (or any other passive) activities. 1040ez tax tables You have no current or prior year unallowed credits from passive activities. 1040ez tax tables Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). 1040ez tax tables You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. 1040ez tax tables   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. 1040ez tax tables On lines 23a through 23e of your Schedule E, enter the applicable amounts. 1040ez tax tables Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. 1040ez tax tables You may be able to deduct the loss on your income tax return. 1040ez tax tables Casualty. 1040ez tax tables   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. 1040ez tax tables Such events include a storm, fire, or earthquake. 1040ez tax tables Theft. 1040ez tax tables   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. 1040ez tax tables Gain from casualty or theft. 1040ez tax tables   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. 1040ez tax tables Generally, you must report this gain. 1040ez tax tables However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. 1040ez tax tables To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. 1040ez tax tables In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. 1040ez tax tables The cost of the replacement property must be equal to or more than the net insurance or other payment you received. 1040ez tax tables More information. 1040ez tax tables   For information on business and nonbusiness casualty and theft losses, see Publication 547. 1040ez tax tables How to report. 1040ez tax tables    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. 1040ez tax tables Follow the Instructions for Form 4684 for where to carry your net gain or loss. 1040ez tax tables Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. 1040ez tax tables In 2013, she rented it all 12 months for a monthly rental fee of $1,125. 1040ez tax tables In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. 1040ez tax tables Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. 1040ez tax tables This means using the straight line method over a recovery period of 27. 1040ez tax tables 5 years. 1040ez tax tables She uses Table 2-2d to find her depreciation percentage. 1040ez tax tables Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. 1040ez tax tables For year 6, the rate is 3. 1040ez tax tables 636%. 1040ez tax tables Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. 1040ez tax tables 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. 1040ez tax tables Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. 1040ez tax tables Marie also meets all of the requirements for not having to file Form 8582. 1040ez tax tables She uses Schedule E, Part I, to report her rental income and expenses. 1040ez tax tables She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. 1040ez tax tables Form 4562 is not required. 1040ez tax tables Prev  Up  Next   Home   More Online Publications
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The 1040ez Tax Tables

1040ez tax tables 2. 1040ez tax tables   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. 1040ez tax tables You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. 1040ez tax tables Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. 1040ez tax tables You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. 1040ez tax tables You can deduct depreciation only on the part of your property used for rental purposes. 1040ez tax tables Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. 1040ez tax tables You may have to use Form 4562 to figure and report your depreciation. 1040ez tax tables See Which Forms To Use in chapter 3. 1040ez tax tables Also see Publication 946. 1040ez tax tables Section 179 deduction. 1040ez tax tables   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. 1040ez tax tables This deduction is not allowed for property used in connection with residential rental property. 1040ez tax tables See chapter 2 of Publication 946. 1040ez tax tables Alternative minimum tax (AMT). 1040ez tax tables   If you use accelerated depreciation, you may be subject to the AMT. 1040ez tax tables 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). 1040ez tax tables   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. 1040ez tax tables However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). 1040ez tax tables   To find out if you are subject to the AMT, see the Instructions for Form 6251. 1040ez tax tables 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. 1040ez tax tables What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. 1040ez tax tables You own the property. 1040ez tax tables You use the property in your business or income-producing activity (such as rental property). 1040ez tax tables The property has a determinable useful life. 1040ez tax tables The property is expected to last more than one year. 1040ez tax tables Property you own. 1040ez tax tables   To claim depreciation, you usually must be the owner of the property. 1040ez tax tables You are considered as owning property even if it is subject to a debt. 1040ez tax tables Rented property. 1040ez tax tables   Generally, if you pay rent for property, you cannot depreciate that property. 1040ez tax tables Usually, only the owner can depreciate it. 1040ez tax tables However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. 1040ez tax tables See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. 1040ez tax tables Cooperative apartments. 1040ez tax tables   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. 1040ez tax tables See chapter 4, Special Situations. 1040ez tax tables Property having a determinable useful life. 1040ez tax tables   To be depreciable, your property must have a determinable useful life. 1040ez tax tables This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 1040ez tax tables What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. 1040ez tax tables This includes land and certain excepted property. 1040ez tax tables Land. 1040ez tax tables   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. 1040ez tax tables But if it does, the loss is accounted for upon disposition. 1040ez tax tables The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. 1040ez tax tables   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. 1040ez tax tables 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. 1040ez tax tables Example. 1040ez tax tables You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. 1040ez tax tables Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. 1040ez tax tables If you replace the house, you would have to destroy the bushes and trees right next to it. 1040ez tax tables These bushes and trees are closely associated with the house, so they have a determinable useful life. 1040ez tax tables Therefore, you can depreciate them. 1040ez tax tables Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. 1040ez tax tables Excepted property. 1040ez tax tables   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. 1040ez tax tables Property placed in service and disposed of (or taken out of business use) in the same year. 1040ez tax tables Equipment used to build capital improvements. 1040ez tax tables You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. 1040ez tax tables For more information, see chapter 1 of Publication 946. 1040ez tax tables When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables Even if you are not using the property, it is in service when it is ready and available for its specific use. 1040ez tax tables Example 1. 1040ez tax tables On November 22 of last year, you purchased a dishwasher for your rental property. 1040ez tax tables The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. 1040ez tax tables Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. 1040ez tax tables 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. 1040ez tax tables Example 2. 1040ez tax tables On April 6, you purchased a house to use as residential rental property. 1040ez tax tables You made extensive repairs to the house and had it ready for rent on July 5. 1040ez tax tables You began to advertise the house for rent in July and actually rented it beginning September 1. 1040ez tax tables The house is considered placed in service in July when it was ready and available for rent. 1040ez tax tables You can begin to depreciate the house in July. 1040ez tax tables Example 3. 1040ez tax tables You moved from your home in July. 1040ez tax tables During August and September you made several repairs to the house. 1040ez tax tables On October 1, you listed the property for rent with a real estate company, which rented it on December 1. 1040ez tax tables The property is considered placed in service on October 1, the date when it was available for rent. 1040ez tax tables Conversion to business use. 1040ez tax tables   If you place property in service in a personal activity, you cannot claim depreciation. 1040ez tax tables 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. 1040ez tax tables You place the property in service for business or income-producing use on the date of the change. 1040ez tax tables Example. 1040ez tax tables You bought a house and used it as your personal home several years before you converted it to rental property. 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables 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). 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. 1040ez tax tables See Basis of Depreciable Property , later. 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables You sell or exchange the property. 1040ez tax tables You convert the property to personal use. 1040ez tax tables You abandon the property. 1040ez tax tables The property is destroyed. 1040ez tax tables Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. 1040ez tax tables If you placed rental property in service before 1987, you are using one of the following methods. 1040ez tax tables ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. 1040ez tax tables Straight line or declining balance method over the useful life of property placed in service before 1981. 1040ez tax tables See MACRS Depreciation , later, for more information. 1040ez tax tables Rental property placed in service before 2013. 1040ez tax tables   Continue to use the same method of figuring depreciation that you used in the past. 1040ez tax tables Use of real property changed. 1040ez tax tables   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. 1040ez tax tables This includes your residence that you changed to rental use. 1040ez tax tables See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. 1040ez tax tables Improvements made after 1986. 1040ez tax tables   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. 1040ez tax tables As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. 1040ez tax tables For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. 1040ez tax tables This publication discusses MACRS depreciation only. 1040ez tax tables If you need information about depreciating property placed in service before 1987, see Publication 534. 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables Basis and adjusted basis are explained in the following discussions. 1040ez tax tables 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. 1040ez tax tables See Basis of Property Changed to Rental Use in chapter 4. 1040ez tax tables Cost Basis The basis of property you buy is usually its cost. 1040ez tax tables The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. 1040ez tax tables Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. 1040ez tax tables Exception. 1040ez tax tables   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. 1040ez tax tables Such taxes were deductible before 1987 and after 2003. 1040ez tax tables Loans with low or no interest. 1040ez tax tables   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. 1040ez tax tables See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. 1040ez tax tables Real property. 1040ez tax tables   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. 1040ez tax tables Real estate taxes. 1040ez tax tables   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. 1040ez tax tables You cannot deduct them as taxes paid. 1040ez tax tables   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. 1040ez tax tables Do not include that amount in your basis in the property. 1040ez tax tables Settlement fees and other costs. 1040ez tax tables   The following settlement fees and closing costs for buying the property are part of your basis in the property. 1040ez tax tables Abstract fees. 1040ez tax tables Charges for installing utility services. 1040ez tax tables Legal fees. 1040ez tax tables Recording fees. 1040ez tax tables Surveys. 1040ez tax tables Transfer taxes. 1040ez tax tables Title insurance. 1040ez tax tables 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. 1040ez tax tables   The following are settlement fees and closing costs you cannot include in your basis in the property. 1040ez tax tables Fire insurance premiums. 1040ez tax tables Rent or other charges relating to occupancy of the property before closing. 1040ez tax tables Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. 1040ez tax tables   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040ez tax tables Assumption of a mortgage. 1040ez tax tables   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. 1040ez tax tables Example. 1040ez tax tables You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. 1040ez tax tables Your basis is $300,000. 1040ez tax tables Separating cost of land and buildings. 1040ez tax tables   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. 1040ez tax tables 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. 1040ez tax tables   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. 1040ez tax tables Example. 1040ez tax tables You buy a house and land for $200,000. 1040ez tax tables The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables 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). 1040ez tax tables 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. 1040ez tax tables If you received property in one of these ways, see Publication 551 for information on how to figure your basis. 1040ez tax tables 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. 1040ez tax tables The result of these adjustments to the basis is the adjusted basis. 1040ez tax tables Increases to basis. 1040ez tax tables   You must increase the basis of any property by the cost of all items properly added to a capital account. 1040ez tax tables These include the following. 1040ez tax tables 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. 1040ez tax tables Amounts spent after a casualty to restore the damaged property. 1040ez tax tables The cost of extending utility service lines to the property. 1040ez tax tables Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. 1040ez tax tables Additions or improvements. 1040ez tax tables   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. 1040ez tax tables This includes all direct costs, such as material and labor, but does not include your own labor. 1040ez tax tables It also includes all expenses related to the addition or improvement. 1040ez tax tables   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. 1040ez tax tables 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. 1040ez tax tables   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. 1040ez tax tables For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. 1040ez tax tables    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. 1040ez tax tables However, see What Rental Property Cannot Be Depreciated, earlier. 1040ez tax tables Assessments for local improvements. 1040ez tax tables   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. 1040ez tax tables 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. 1040ez tax tables Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. 1040ez tax tables You cannot deduct these items as taxes or depreciate them. 1040ez tax tables    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. 1040ez tax tables Do not add them to your basis in the property. 1040ez tax tables Deducting vs. 1040ez tax tables capitalizing costs. 1040ez tax tables   Do not add to your basis costs you can deduct as current expenses. 1040ez tax tables However, there are certain costs you can choose either to deduct or to capitalize. 1040ez tax tables If you capitalize these costs, include them in your basis. 1040ez tax tables If you deduct them, do not include them in your basis. 1040ez tax tables   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. 1040ez tax tables   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. 1040ez tax tables Decreases to basis. 1040ez tax tables   You must decrease the basis of your property by any items that represent a return of your cost. 1040ez tax tables These include the following. 1040ez tax tables Insurance or other payment you receive as the result of a casualty or theft loss. 1040ez tax tables Casualty loss not covered by insurance for which you took a deduction. 1040ez tax tables Amount(s) you receive for granting an easement. 1040ez tax tables Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. 1040ez tax tables Exclusion from income of subsidies for energy conservation measures. 1040ez tax tables Special depreciation allowance claimed on qualified property. 1040ez tax tables Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1040ez tax tables If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. 1040ez tax tables   If your rental property was previously used as your main home, you must also decrease the basis by the following. 1040ez tax tables Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. 1040ez tax tables District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. 1040ez tax tables Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. 1040ez tax tables Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. 1040ez tax tables This allowance is figured before you figure your regular depreciation deduction. 1040ez tax tables See Publication 946, chapter 3, for details. 1040ez tax tables Also see the Instructions for Form 4562, Line 14. 1040ez tax tables If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. 1040ez tax tables The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. 1040ez tax tables MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. 1040ez tax tables This section explains how to determine which MACRS depreciation system applies to your property. 1040ez tax tables It also discusses other information you need to know before you can figure depreciation under MACRS. 1040ez tax tables This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. 1040ez tax tables 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). 1040ez tax tables You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. 1040ez tax tables Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. 1040ez tax tables In most cases, 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. 1040ez tax tables However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. 1040ez tax tables For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. 1040ez tax tables Electing ADS If you choose, you can use the ADS method for most property. 1040ez tax tables Under ADS, you use the straight line method of depreciation. 1040ez tax tables 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. 1040ez tax tables However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. 1040ez tax tables If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. 1040ez tax tables Once you make this election, you can never revoke it. 1040ez tax tables For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. 1040ez tax tables 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. 1040ez tax tables The property class generally determines the depreciation method, recovery period, and convention. 1040ez tax tables 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. 1040ez tax tables Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. 1040ez tax tables 5-year property. 1040ez tax tables This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. 1040ez tax tables ), automobiles, and light trucks. 1040ez tax tables This class also includes appliances, carpeting, furniture, etc. 1040ez tax tables , used in a residential rental real estate activity. 1040ez tax tables Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. 1040ez tax tables See chapter 5 of Publication 946. 1040ez tax tables 7-year property. 1040ez tax tables This class includes office furniture and equipment (desks, file cabinets, etc. 1040ez tax tables ). 1040ez tax tables 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. 1040ez tax tables 15-year property. 1040ez tax tables This class includes roads, fences, and shrubbery (if depreciable). 1040ez tax tables Residential rental property. 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables 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. 1040ez tax tables The other property classes do not generally apply to property used in rental activities. 1040ez tax tables These classes are not discussed in this publication. 1040ez tax tables See Publication 946 for more information. 1040ez tax tables Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. 1040ez tax tables The recovery periods are generally longer under ADS than GDS. 1040ez tax tables The recovery period of property depends on its property class. 1040ez tax tables Under GDS, the recovery period of an asset is generally the same as its property class. 1040ez tax tables Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. 1040ez tax tables See Table 2-1 for recovery periods of property commonly used in residential rental activities. 1040ez tax tables Qualified Indian reservation property. 1040ez tax tables   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. 1040ez tax tables For more information, see chapter 4 of Publication 946. 1040ez tax tables Additions or improvements to property. 1040ez tax tables   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. 1040ez tax tables   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. 1040ez tax tables   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. 1040ez tax tables Example. 1040ez tax tables You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. 1040ez tax tables You built an addition onto the house and placed it in service in 2013. 1040ez tax tables You must use MACRS for the addition. 1040ez tax tables Under GDS, the addition is depreciated as residential rental property over 27. 1040ez tax tables 5 years. 1040ez tax tables Table 2-1. 1040ez tax tables 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. 1040ez tax tables 27. 1040ez tax tables 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. 1040ez tax tables   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. 1040ez tax tables 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. 1040ez tax tables Mid-month convention. 1040ez tax tables    A mid-month convention is used for all residential rental property and nonresidential real property. 1040ez tax tables 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. 1040ez tax tables Mid-quarter convention. 1040ez tax tables   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. 1040ez tax tables   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. 1040ez tax tables Example. 1040ez tax tables During the tax year, Tom Martin purchased the following items to use in his rental property. 1040ez tax tables He elects not to claim the special depreciation allowance discussed earlier. 1040ez tax tables A dishwasher for $400 that he placed in service in January. 1040ez tax tables Used furniture for $100 that he placed in service in September. 1040ez tax tables A refrigerator for $800 that he placed in service in October. 1040ez tax tables Tom uses the calendar year as his tax year. 1040ez tax tables The total basis of all property placed in service that year is $1,300. 1040ez tax tables The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). 1040ez tax tables Tom must use the mid-quarter convention instead of the half-year convention for all three items. 1040ez tax tables Half-year convention. 1040ez tax tables    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. 1040ez tax tables 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. 1040ez tax tables   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. 1040ez tax tables You deduct a full year of depreciation for any other year during the recovery period. 1040ez tax tables Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. 1040ez tax tables The deduction is substantially the same both ways. 1040ez tax tables 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. 1040ez tax tables In this publication we will use the percentage tables. 1040ez tax tables For instructions on how to compute the deduction, see chapter 4 of Publication 946. 1040ez tax tables Residential rental property. 1040ez tax tables   You must use the straight line method and a mid-month convention for residential rental property. 1040ez tax tables 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). 1040ez tax tables 5-, 7-, or 15-year property. 1040ez tax tables   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. 1040ez tax tables However, in limited cases you must use the mid-quarter convention, if it applies. 1040ez tax tables For property in the 15-year class, use the 150% declining balance method and a half-year convention. 1040ez tax tables   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. 1040ez tax tables 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. 1040ez tax tables You make this election on Form 4562. 1040ez tax tables In Part III, column (f), enter “150 DB. 1040ez tax tables ” Once you make this election, you cannot change to another method. 1040ez tax tables   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. 1040ez tax tables   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. 1040ez tax tables 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. 1040ez tax tables You elect the straight line method on Form 4562. 1040ez tax tables In Part III, column (f), enter “S/L. 1040ez tax tables ” Once you make this election, you cannot change to another method. 1040ez tax tables MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. 1040ez tax tables The tables show the percentages for the first few years or until the change to the straight line method is made. 1040ez tax tables See Appendix A of Publication 946 for complete tables. 1040ez tax 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. 1040ez tax 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. 1040ez tax tables How to use the percentage tables. 1040ez tax tables   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. 1040ez tax tables   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: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. 1040ez tax tables   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. 1040ez tax tables 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 earlier under Figuring Your Depreciation Deduction . 1040ez tax tables See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. 1040ez tax tables Unadjusted basis. 1040ez tax tables   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. 1040ez tax tables   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. 1040ez tax tables For more information, see chapter 4 of Publication 946. 1040ez tax tables Please click here for the text description of the image. 1040ez tax tables Table 2-2 Tables 2-2a, 2-2b, and 2-2c. 1040ez tax tables   The percentages in these tables take into account the half-year and mid-quarter conventions. 1040ez tax tables Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. 1040ez tax tables Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). 1040ez tax tables 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. 1040ez tax tables Example 1. 1040ez tax tables You purchased a stove and refrigerator and placed them in service in June. 1040ez tax tables Your basis in the stove is $600 and your basis in the refrigerator is $1,000. 1040ez tax tables Both are 5-year property. 1040ez tax tables Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. 1040ez tax tables For that year your depreciation deduction is $120 ($600 × . 1040ez tax tables 20) for the stove and $200 ($1,000 × . 1040ez tax tables 20) for the refrigerator. 1040ez tax tables For Year 2, the depreciation percentage is 32%. 1040ez tax tables That year's depreciation deduction will be $192 ($600 × . 1040ez tax tables 32) for the stove and $320 ($1,000 × . 1040ez tax tables 32) for the refrigerator. 1040ez tax tables Example 2. 1040ez tax tables Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. 1040ez tax tables 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 × . 1040ez tax tables 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. 1040ez tax tables 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%. 1040ez tax tables Your depreciation deduction for the refrigerator is $50 ($1,000 x . 1040ez tax tables 05). 1040ez tax tables 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%. 1040ez tax tables For that year, your depreciation deduction for the stove is $150 ($600 x . 1040ez tax tables 25). 1040ez tax tables Table 2-2d. 1040ez tax tables    Use this table when you are using the GDS 27. 1040ez tax tables 5 year option for residential rental property. 1040ez tax tables Find the row for the month that you placed the property in service. 1040ez tax tables Use the percentages listed for that month to figure your depreciation deduction. 1040ez tax tables The mid-month convention is taken into account in the percentages shown in the table. 1040ez tax tables Continue to use the same row (month) under the column for the appropriate year. 1040ez tax tables Example. 1040ez tax tables You purchased a single family rental house for $185,000 and placed it in service on February 8. 1040ez tax tables The sales contract showed that the building cost $160,000 and the land cost $25,000. 1040ez tax tables Your basis for depreciation is its original cost, $160,000. 1040ez tax tables This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. 1040ez tax tables 5 years. 1040ez tax tables Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. 1040ez tax tables 182%. 1040ez tax tables That year's depreciation deduction is $5,091 ($160,000 x . 1040ez tax tables 03182). 1040ez tax tables Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. 1040ez tax tables See Appendix B in Publication 946 for other property. 1040ez tax tables If your property is not listed in Appendix B, it is considered to have no class life. 1040ez tax tables Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. 1040ez tax tables Use the mid-month convention for residential rental property and nonresidential real property. 1040ez tax tables For all other property, use the half-year or mid-quarter convention, as appropriate. 1040ez tax tables See Publication 946 for ADS depreciation tables. 1040ez tax tables Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. 1040ez tax tables 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. 1040ez tax tables For more information, see Depreciation under Decreases to Basis in Publication 551. 1040ez tax tables 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. 1040ez tax tables S. 1040ez tax tables Individual Income Tax Return. 1040ez tax tables 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. 1040ez tax tables Filing an amended return. 1040ez tax tables   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. 1040ez tax tables You claimed the incorrect amount because of a mathematical error made in any year. 1040ez tax tables You claimed the incorrect amount because of a posting error made in any year. 1040ez tax tables You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. 1040ez tax tables You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. 1040ez tax tables   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. 1040ez tax tables 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. 1040ez tax tables   If an amended return is allowed, you must file it by the later of the following dates. 1040ez tax tables 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 1040ez tax tables A return filed before an unextended due date is considered filed on that due date. 1040ez tax tables 2 years from the time you paid your tax for that year. 1040ez tax tables Changing your accounting method. 1040ez tax tables   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. 1040ez tax tables In some instances, that consent is automatic. 1040ez tax tables For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. 1040ez tax tables Prev  Up  Next   Home   More Online Publications