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Ez Form

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Ez Form

Ez form 1. Ez form   Canceled Debts Table of Contents General RulesForm 1099-C Discounts and loan modifications Sales or other dispositions (such as foreclosures and repossessions) Abandonments Stockholder debt This chapter discusses the tax treatment of canceled debts. Ez form General Rules Generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the debt is considered canceled in whatever amount it remained unpaid. Ez form There are exceptions to this rule, discussed under Exceptions , later. Ez form Generally, you must include the canceled debt in your income. Ez form However, you may be able to exclude the canceled debt. Ez form See Exclusions , later. Ez form Example. Ez form John owed $1,000 to Mary. Ez form Mary agreed to accept and John paid $400 in satisfaction of the entire debt. Ez form John has canceled debt of $600. Ez form Example. Ez form Margaret owed $1,000 to Henry. Ez form Henry and Margaret agreed that Margaret would provide Henry with services (instead of money) in full satisfaction of the debt. Ez form Margaret does not have canceled debt. Ez form Instead, she has income from services. Ez form A debt includes any indebtedness: For which you are liable, or Subject to which you hold property. Ez form Debt for which you are personally liable is recourse debt. Ez form All other debt is nonrecourse debt. Ez form If you are not personally liable for the debt, you do not have ordinary income from the cancellation of debt unless you retain the collateral and either: The lender offers a discount for the early payment of the debt, or The lender agrees to a loan modification that results in the reduction of the principal balance of the debt. Ez form See Discounts and loan modifications , later. Ez form However, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property. Ez form As a result, you may realize a gain or loss if the outstanding debt immediately before the disposition is more or less than your adjusted basis in the property. Ez form For more details on figuring your gain or loss, see chapter 2 of this publication or see Publication 544. Ez form There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. Ez form See Exceptions and Exclusions, later. Ez form You must report any taxable canceled debt as ordinary income on: Form 1040 or Form 1040NR, line 21, if the debt is a nonbusiness debt; Schedule C (Form 1040), line 6 (or Schedule C-EZ (Form 1040), line 1), if the debt is related to a nonfarm sole proprietorship; Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property; Form 4835, line 6, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or Schedule F (Form 1040), line 8, if the debt is farm debt and you are a farmer. Ez form Form 1099-C If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. Ez form The identifiable event may be an actual cancellation of the debt or it may be an event the applicable entity is required, solely for purposes of reporting to the IRS, to treat as a cancellation of debt. Ez form For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes, later. Ez form Unless you meet one of the exceptions or exclusions discussed later, this canceled debt is ordinary income and must be reported on the appropriate form discussed above. Ez form An applicable entity includes: A federal government agency, A financial institution, A credit union, and Any organization a significant trade or business of which is lending money. Ez form Identifiable event codes. Ez form    Box 6 of Form 1099-C should indicate the reason the creditor filed this form. Ez form The codes shown in box 6 are explained below. Ez form Also see the chart after the explanation for a quick reference guide for the codes used in Box 6. Ez form Note. Ez form Codes A through G and I identify specific occurrences resulting from an actual discharge of indebtedness. Ez form However, Code H, Expiration of nonpayment testing period, does not necessarily identify an actual discharge of indebtedness. Ez form Code A — Bankruptcy. Ez form Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. Ez form See Bankruptcy , later. Ez form Code B — Other judicial debt relief. Ez form Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy. Ez form Code C — Statute of limitations or expiration of deficiency period. Ez form Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Ez form In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired. Ez form Code D — Foreclosure election. Ez form Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. Ez form This event applies to a mortgage lender or holder who is barred from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised. Ez form Code E — Debt relief from probate or similar proceeding. Ez form Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding. Ez form Code F — By agreement. Ez form Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration. Ez form Code G — Decision or policy to discontinue collection. Ez form Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. Ez form For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice. Ez form Code H — Expiration of nonpayment testing period. Ez form Code H is used to indicate that the creditor has not received a payment on the debt during a testing period ending on December 31, 2013. Ez form The testing period is a 36-month period increased by the number of months the creditor was prevented from engaging in collection activity by a stay in bankruptcy or similar bar under state or local law. Ez form This identifiable event applies only for a creditor that is a financial institution or credit union (and certain of their subsidiaries), the Federal Deposit Insurance Corporation (FDIC), Resolution Trust Corporation (RTC), National Credit Union Administration (NCUA), and other Federal executive agencies. Ez form Expiration of the nonpayment testing period does not necessarily result from an actual discharge of indebtedness. Ez form Code I — Other actual discharge before identifiable event. Ez form Code I is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through H. Ez form Form 1099-C Reference Guide for Box 6 Identifiable Event Codes A Bankruptcy B Other judicial debt relief C Statute of limitations or expiration of deficiency period D Foreclosure election E Debt relief from probate or similar proceeding F By agreement G Decision or policy to discontinue collection H Expiration of nonpayment testing period I Other actual discharge before identifiable event Even if you did not receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies. Ez form Amount of canceled debt. Ez form    The amount in box 2 of Form 1099-C may represent some or all of the debt that has been canceled or treated as canceled. Ez form The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). Ez form Unless you meet one of the exceptions or exclusions discussed later, the amount of the debt that has been canceled is ordinary income and must be reported on the appropriate form as discussed earlier. Ez form Interest included in canceled debt. Ez form    If any interest is included in the amount of canceled debt in box 2, it will be shown in box 3. Ez form Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it. Ez form See Deductible Debt under Exceptions, later. Ez form Persons who each receive a Form 1099-C showing the full amount of debt. Ez form    If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. Ez form However, you may not have to report that entire amount as income. Ez form The amount, if any, you must report depends on all the facts and circumstances, including: State law, The amount of debt proceeds each person received, How much of any interest deduction from the debt was claimed by each person, How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication. Ez form See Example 3 under Insolvency, later. Ez form Discounts and loan modifications If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt. Ez form However, if the debt is nonrecourse and you did not retain the collateral, you do not have cancellation of the debt income. Ez form The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. Ez form For more details, see Exceptions and Exclusions, later. Ez form Sales or other dispositions (such as foreclosures and repossessions) Recourse debt. Ez form   If you owned property that was subject to a recourse debt in excess of the FMV of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss. Ez form The gain or loss on the disposition of the property is measured by the difference between the FMV of the property at the time of the disposition and your adjusted basis (usually your cost) in the property. Ez form The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. Ez form If the lender forgives all or part of the amount of the debt in excess of the FMV of the property, the cancellation of the excess debt may result in ordinary income. Ez form The ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV of the property) must be included in your gross income reported on your tax return unless one of the exceptions or exclusions described later applies. Ez form For more details, see Exceptions and Exclusions, later. Ez form Nonrecourse debt. Ez form   If you owned property that was subject to a nonrecourse debt in excess of the FMV of the property, the lender's foreclosure on the property does not result in ordinary income from the cancellation of debt. Ez form The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. Ez form The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. Ez form The character of the gain or loss is determined by the character of the property. Ez form More information. Ez form    See Publications 523, 544, and 551, and chapter 2 of this publication for more details. Ez form Abandonments Recourse debt. Ez form   If you abandon property that secures a debt for which you are personally liable (recourse debt) and the debt is canceled, you will realize ordinary income equal to the canceled debt. Ez form You must report this income on your tax return unless one of the exceptions or exclusions described later applies. Ez form For more details, see Exceptions and Exclusions, later. Ez form This income is separate from any amount realized from the abandonment of the property. Ez form For more details, see chapter 3. Ez form Nonrecourse debt. Ez form   If you abandon property that secures a debt for which you are not personally liable (nonrecourse debt), you may realize gain or loss but will not have cancellation of indebtedness income. Ez form Stockholder debt If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution. Ez form For more information, see Publication 542, Corporations. Ez form Prev  Up  Next   Home   More Online Publications
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The Ez Form

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