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H&r Block Free State Tax Filing

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

H&r block free state tax filing Publication 529 - Additional Material Prev  Up  Next   Home   More Online Publications