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Irs Form 1040 2012

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Irs Form 1040 2012

Irs form 1040 2012 2. Irs form 1040 2012   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. Irs form 1040 2012 You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Irs form 1040 2012 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. Irs form 1040 2012 You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Irs form 1040 2012 You can deduct depreciation only on the part of your property used for rental purposes. Irs form 1040 2012 Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Irs form 1040 2012 You may have to use Form 4562 to figure and report your depreciation. Irs form 1040 2012 See Which Forms To Use in chapter 3. Irs form 1040 2012 Also see Publication 946. Irs form 1040 2012 Section 179 deduction. Irs form 1040 2012   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. Irs form 1040 2012 This deduction is not allowed for property used in connection with residential rental property. Irs form 1040 2012 See chapter 2 of Publication 946. Irs form 1040 2012 Alternative minimum tax (AMT). Irs form 1040 2012   If you use accelerated depreciation, you may be subject to the AMT. Irs form 1040 2012 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). Irs form 1040 2012   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Irs form 1040 2012 However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Irs form 1040 2012   To find out if you are subject to the AMT, see the Instructions for Form 6251. Irs form 1040 2012 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. Irs form 1040 2012 What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Irs form 1040 2012 You own the property. Irs form 1040 2012 You use the property in your business or income-producing activity (such as rental property). Irs form 1040 2012 The property has a determinable useful life. Irs form 1040 2012 The property is expected to last more than one year. Irs form 1040 2012 Property you own. Irs form 1040 2012   To claim depreciation, you usually must be the owner of the property. Irs form 1040 2012 You are considered as owning property even if it is subject to a debt. Irs form 1040 2012 Rented property. Irs form 1040 2012   Generally, if you pay rent for property, you cannot depreciate that property. Irs form 1040 2012 Usually, only the owner can depreciate it. Irs form 1040 2012 However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Irs form 1040 2012 See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Irs form 1040 2012 Cooperative apartments. Irs form 1040 2012   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. Irs form 1040 2012 See chapter 4, Special Situations. Irs form 1040 2012 Property having a determinable useful life. Irs form 1040 2012   To be depreciable, your property must have a determinable useful life. Irs form 1040 2012 This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Irs form 1040 2012 What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Irs form 1040 2012 This includes land and certain excepted property. Irs form 1040 2012 Land. Irs form 1040 2012   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Irs form 1040 2012 But if it does, the loss is accounted for upon disposition. Irs form 1040 2012 The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Irs form 1040 2012   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Irs form 1040 2012 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. Irs form 1040 2012 Example. Irs form 1040 2012 You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Irs form 1040 2012 Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Irs form 1040 2012 If you replace the house, you would have to destroy the bushes and trees right next to it. Irs form 1040 2012 These bushes and trees are closely associated with the house, so they have a determinable useful life. Irs form 1040 2012 Therefore, you can depreciate them. Irs form 1040 2012 Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Irs form 1040 2012 Excepted property. Irs form 1040 2012   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Irs form 1040 2012 Property placed in service and disposed of (or taken out of business use) in the same year. Irs form 1040 2012 Equipment used to build capital improvements. Irs form 1040 2012 You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Irs form 1040 2012 For more information, see chapter 1 of Publication 946. Irs form 1040 2012 When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 Even if you are not using the property, it is in service when it is ready and available for its specific use. Irs form 1040 2012 Example 1. Irs form 1040 2012 On November 22 of last year, you purchased a dishwasher for your rental property. Irs form 1040 2012 The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Irs form 1040 2012 Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Irs form 1040 2012 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. Irs form 1040 2012 Example 2. Irs form 1040 2012 On April 6, you purchased a house to use as residential rental property. Irs form 1040 2012 You made extensive repairs to the house and had it ready for rent on July 5. Irs form 1040 2012 You began to advertise the house for rent in July and actually rented it beginning September 1. Irs form 1040 2012 The house is considered placed in service in July when it was ready and available for rent. Irs form 1040 2012 You can begin to depreciate the house in July. Irs form 1040 2012 Example 3. Irs form 1040 2012 You moved from your home in July. Irs form 1040 2012 During August and September you made several repairs to the house. Irs form 1040 2012 On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Irs form 1040 2012 The property is considered placed in service on October 1, the date when it was available for rent. Irs form 1040 2012 Conversion to business use. Irs form 1040 2012   If you place property in service in a personal activity, you cannot claim depreciation. Irs form 1040 2012 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. Irs form 1040 2012 You place the property in service for business or income-producing use on the date of the change. Irs form 1040 2012 Example. Irs form 1040 2012 You bought a house and used it as your personal home several years before you converted it to rental property. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 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). Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Irs form 1040 2012 See Basis of Depreciable Property , later. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 You sell or exchange the property. Irs form 1040 2012 You convert the property to personal use. Irs form 1040 2012 You abandon the property. Irs form 1040 2012 The property is destroyed. Irs form 1040 2012 Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Irs form 1040 2012 If you placed rental property in service before 1987, you are using one of the following methods. Irs form 1040 2012 ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Irs form 1040 2012 Straight line or declining balance method over the useful life of property placed in service before 1981. Irs form 1040 2012 See MACRS Depreciation , later, for more information. Irs form 1040 2012 Rental property placed in service before 2013. Irs form 1040 2012   Continue to use the same method of figuring depreciation that you used in the past. Irs form 1040 2012 Use of real property changed. Irs form 1040 2012   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. Irs form 1040 2012 This includes your residence that you changed to rental use. Irs form 1040 2012 See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Irs form 1040 2012 Improvements made after 1986. Irs form 1040 2012   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Irs form 1040 2012 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. Irs form 1040 2012 For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Irs form 1040 2012 This publication discusses MACRS depreciation only. Irs form 1040 2012 If you need information about depreciating property placed in service before 1987, see Publication 534. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 Basis and adjusted basis are explained in the following discussions. Irs form 1040 2012 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. Irs form 1040 2012 See Basis of Property Changed to Rental Use in chapter 4. Irs form 1040 2012 Cost Basis The basis of property you buy is usually its cost. Irs form 1040 2012 The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Irs form 1040 2012 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. Irs form 1040 2012 Exception. Irs form 1040 2012   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. Irs form 1040 2012 Such taxes were deductible before 1987 and after 2003. Irs form 1040 2012 Loans with low or no interest. Irs form 1040 2012   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. Irs form 1040 2012 See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Irs form 1040 2012 Real property. Irs form 1040 2012   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. Irs form 1040 2012 Real estate taxes. Irs form 1040 2012   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. Irs form 1040 2012 You cannot deduct them as taxes paid. Irs form 1040 2012   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Irs form 1040 2012 Do not include that amount in your basis in the property. Irs form 1040 2012 Settlement fees and other costs. Irs form 1040 2012   The following settlement fees and closing costs for buying the property are part of your basis in the property. Irs form 1040 2012 Abstract fees. Irs form 1040 2012 Charges for installing utility services. Irs form 1040 2012 Legal fees. Irs form 1040 2012 Recording fees. Irs form 1040 2012 Surveys. Irs form 1040 2012 Transfer taxes. Irs form 1040 2012 Title insurance. Irs form 1040 2012 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. Irs form 1040 2012   The following are settlement fees and closing costs you cannot include in your basis in the property. Irs form 1040 2012 Fire insurance premiums. Irs form 1040 2012 Rent or other charges relating to occupancy of the property before closing. Irs form 1040 2012 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. Irs form 1040 2012   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Irs form 1040 2012 Assumption of a mortgage. Irs form 1040 2012   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. Irs form 1040 2012 Example. Irs form 1040 2012 You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Irs form 1040 2012 Your basis is $300,000. Irs form 1040 2012 Separating cost of land and buildings. Irs form 1040 2012   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. Irs form 1040 2012 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. Irs form 1040 2012   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. Irs form 1040 2012 Example. Irs form 1040 2012 You buy a house and land for $200,000. Irs form 1040 2012 The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 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). Irs form 1040 2012 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. Irs form 1040 2012 If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Irs form 1040 2012 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. Irs form 1040 2012 The result of these adjustments to the basis is the adjusted basis. Irs form 1040 2012 Increases to basis. Irs form 1040 2012   You must increase the basis of any property by the cost of all items properly added to a capital account. Irs form 1040 2012 These include the following. Irs form 1040 2012 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. Irs form 1040 2012 Amounts spent after a casualty to restore the damaged property. Irs form 1040 2012 The cost of extending utility service lines to the property. Irs form 1040 2012 Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Irs form 1040 2012 Additions or improvements. Irs form 1040 2012   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. Irs form 1040 2012 This includes all direct costs, such as material and labor, but does not include your own labor. Irs form 1040 2012 It also includes all expenses related to the addition or improvement. Irs form 1040 2012   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. Irs form 1040 2012 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. Irs form 1040 2012   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Irs form 1040 2012 For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Irs form 1040 2012    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Irs form 1040 2012 However, see What Rental Property Cannot Be Depreciated, earlier. Irs form 1040 2012 Assessments for local improvements. Irs form 1040 2012   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. Irs form 1040 2012 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. Irs form 1040 2012 Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Irs form 1040 2012 You cannot deduct these items as taxes or depreciate them. Irs form 1040 2012    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Irs form 1040 2012 Do not add them to your basis in the property. Irs form 1040 2012 Deducting vs. Irs form 1040 2012 capitalizing costs. Irs form 1040 2012   Do not add to your basis costs you can deduct as current expenses. Irs form 1040 2012 However, there are certain costs you can choose either to deduct or to capitalize. Irs form 1040 2012 If you capitalize these costs, include them in your basis. Irs form 1040 2012 If you deduct them, do not include them in your basis. Irs form 1040 2012   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Irs form 1040 2012   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Irs form 1040 2012 Decreases to basis. Irs form 1040 2012   You must decrease the basis of your property by any items that represent a return of your cost. Irs form 1040 2012 These include the following. Irs form 1040 2012 Insurance or other payment you receive as the result of a casualty or theft loss. Irs form 1040 2012 Casualty loss not covered by insurance for which you took a deduction. Irs form 1040 2012 Amount(s) you receive for granting an easement. Irs form 1040 2012 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. Irs form 1040 2012 Exclusion from income of subsidies for energy conservation measures. Irs form 1040 2012 Special depreciation allowance claimed on qualified property. Irs form 1040 2012 Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Irs form 1040 2012 If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Irs form 1040 2012   If your rental property was previously used as your main home, you must also decrease the basis by the following. Irs form 1040 2012 Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Irs form 1040 2012 District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Irs form 1040 2012 Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Irs form 1040 2012 Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Irs form 1040 2012 This allowance is figured before you figure your regular depreciation deduction. Irs form 1040 2012 See Publication 946, chapter 3, for details. Irs form 1040 2012 Also see the Instructions for Form 4562, Line 14. Irs form 1040 2012 If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Irs form 1040 2012 The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Irs form 1040 2012 MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Irs form 1040 2012 This section explains how to determine which MACRS depreciation system applies to your property. Irs form 1040 2012 It also discusses other information you need to know before you can figure depreciation under MACRS. Irs form 1040 2012 This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Irs form 1040 2012 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). Irs form 1040 2012 You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Irs form 1040 2012 Electing ADS If you choose, you can use the ADS method for most property. Irs form 1040 2012 Under ADS, you use the straight line method of depreciation. Irs form 1040 2012 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. Irs form 1040 2012 However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Irs form 1040 2012 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. Irs form 1040 2012 Once you make this election, you can never revoke it. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 The property class generally determines the depreciation method, recovery period, and convention. Irs form 1040 2012 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. Irs form 1040 2012 Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Irs form 1040 2012 5-year property. Irs form 1040 2012 This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Irs form 1040 2012 ), automobiles, and light trucks. Irs form 1040 2012 This class also includes appliances, carpeting, furniture, etc. Irs form 1040 2012 , used in a residential rental real estate activity. Irs form 1040 2012 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. Irs form 1040 2012 See chapter 5 of Publication 946. Irs form 1040 2012 7-year property. Irs form 1040 2012 This class includes office furniture and equipment (desks, file cabinets, etc. Irs form 1040 2012 ). Irs form 1040 2012 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. Irs form 1040 2012 15-year property. Irs form 1040 2012 This class includes roads, fences, and shrubbery (if depreciable). Irs form 1040 2012 Residential rental property. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 The other property classes do not generally apply to property used in rental activities. Irs form 1040 2012 These classes are not discussed in this publication. Irs form 1040 2012 See Publication 946 for more information. Irs form 1040 2012 Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Irs form 1040 2012 The recovery periods are generally longer under ADS than GDS. Irs form 1040 2012 The recovery period of property depends on its property class. Irs form 1040 2012 Under GDS, the recovery period of an asset is generally the same as its property class. Irs form 1040 2012 Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Irs form 1040 2012 See Table 2-1 for recovery periods of property commonly used in residential rental activities. Irs form 1040 2012 Qualified Indian reservation property. Irs form 1040 2012   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Irs form 1040 2012 For more information, see chapter 4 of Publication 946. Irs form 1040 2012 Additions or improvements to property. Irs form 1040 2012   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Irs form 1040 2012   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. Irs form 1040 2012   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. Irs form 1040 2012 Example. Irs form 1040 2012 You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Irs form 1040 2012 You built an addition onto the house and placed it in service in 2013. Irs form 1040 2012 You must use MACRS for the addition. Irs form 1040 2012 Under GDS, the addition is depreciated as residential rental property over 27. Irs form 1040 2012 5 years. Irs form 1040 2012 Table 2-1. Irs form 1040 2012 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. Irs form 1040 2012 27. Irs form 1040 2012 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. Irs form 1040 2012   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Irs form 1040 2012 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. Irs form 1040 2012 Mid-month convention. Irs form 1040 2012    A mid-month convention is used for all residential rental property and nonresidential real property. Irs form 1040 2012 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. Irs form 1040 2012 Mid-quarter convention. Irs form 1040 2012   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. Irs form 1040 2012   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. Irs form 1040 2012 Example. Irs form 1040 2012 During the tax year, Tom Martin purchased the following items to use in his rental property. Irs form 1040 2012 He elects not to claim the special depreciation allowance discussed earlier. Irs form 1040 2012 A dishwasher for $400 that he placed in service in January. Irs form 1040 2012 Used furniture for $100 that he placed in service in September. Irs form 1040 2012 A refrigerator for $800 that he placed in service in October. Irs form 1040 2012 Tom uses the calendar year as his tax year. Irs form 1040 2012 The total basis of all property placed in service that year is $1,300. Irs form 1040 2012 The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Irs form 1040 2012 Tom must use the mid-quarter convention instead of the half-year convention for all three items. Irs form 1040 2012 Half-year convention. Irs form 1040 2012    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Irs form 1040 2012 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. Irs form 1040 2012   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. Irs form 1040 2012 You deduct a full year of depreciation for any other year during the recovery period. Irs form 1040 2012 Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Irs form 1040 2012 The deduction is substantially the same both ways. Irs form 1040 2012 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. Irs form 1040 2012 In this publication we will use the percentage tables. Irs form 1040 2012 For instructions on how to compute the deduction, see chapter 4 of Publication 946. Irs form 1040 2012 Residential rental property. Irs form 1040 2012   You must use the straight line method and a mid-month convention for residential rental property. Irs form 1040 2012 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). Irs form 1040 2012 5-, 7-, or 15-year property. Irs form 1040 2012   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Irs form 1040 2012 However, in limited cases you must use the mid-quarter convention, if it applies. Irs form 1040 2012 For property in the 15-year class, use the 150% declining balance method and a half-year convention. Irs form 1040 2012   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Irs form 1040 2012 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. Irs form 1040 2012 You make this election on Form 4562. Irs form 1040 2012 In Part III, column (f), enter “150 DB. Irs form 1040 2012 ” Once you make this election, you cannot change to another method. Irs form 1040 2012   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. Irs form 1040 2012   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. Irs form 1040 2012 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. Irs form 1040 2012 You elect the straight line method on Form 4562. Irs form 1040 2012 In Part III, column (f), enter “S/L. Irs form 1040 2012 ” Once you make this election, you cannot change to another method. Irs form 1040 2012 MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Irs form 1040 2012 The tables show the percentages for the first few years or until the change to the straight line method is made. Irs form 1040 2012 See Appendix A of Publication 946 for complete tables. Irs form 1040 2012 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. Irs form 1040 2012 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. Irs form 1040 2012 How to use the percentage tables. Irs form 1040 2012   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Irs form 1040 2012   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. Irs form 1040 2012   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. Irs form 1040 2012 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 . Irs form 1040 2012 See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Irs form 1040 2012 Unadjusted basis. Irs form 1040 2012   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. Irs form 1040 2012   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. Irs form 1040 2012 For more information, see chapter 4 of Publication 946. Irs form 1040 2012 Please click here for the text description of the image. Irs form 1040 2012 Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Irs form 1040 2012   The percentages in these tables take into account the half-year and mid-quarter conventions. Irs form 1040 2012 Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Irs form 1040 2012 Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Irs form 1040 2012 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. Irs form 1040 2012 Example 1. Irs form 1040 2012 You purchased a stove and refrigerator and placed them in service in June. Irs form 1040 2012 Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Irs form 1040 2012 Both are 5-year property. Irs form 1040 2012 Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Irs form 1040 2012 For that year your depreciation deduction is $120 ($600 × . Irs form 1040 2012 20) for the stove and $200 ($1,000 × . Irs form 1040 2012 20) for the refrigerator. Irs form 1040 2012 For Year 2, the depreciation percentage is 32%. Irs form 1040 2012 That year's depreciation deduction will be $192 ($600 × . Irs form 1040 2012 32) for the stove and $320 ($1,000 × . Irs form 1040 2012 32) for the refrigerator. Irs form 1040 2012 Example 2. Irs form 1040 2012 Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Irs form 1040 2012 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 × . Irs form 1040 2012 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Irs form 1040 2012 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%. Irs form 1040 2012 Your depreciation deduction for the refrigerator is $50 ($1,000 x . Irs form 1040 2012 05). Irs form 1040 2012 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%. Irs form 1040 2012 For that year, your depreciation deduction for the stove is $150 ($600 x . Irs form 1040 2012 25). Irs form 1040 2012 Table 2-2d. Irs form 1040 2012    Use this table when you are using the GDS 27. Irs form 1040 2012 5 year option for residential rental property. Irs form 1040 2012 Find the row for the month that you placed the property in service. Irs form 1040 2012 Use the percentages listed for that month to figure your depreciation deduction. Irs form 1040 2012 The mid-month convention is taken into account in the percentages shown in the table. Irs form 1040 2012 Continue to use the same row (month) under the column for the appropriate year. Irs form 1040 2012 Example. Irs form 1040 2012 You purchased a single family rental house for $185,000 and placed it in service on February 8. Irs form 1040 2012 The sales contract showed that the building cost $160,000 and the land cost $25,000. Irs form 1040 2012 Your basis for depreciation is its original cost, $160,000. Irs form 1040 2012 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. Irs form 1040 2012 5 years. Irs form 1040 2012 Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Irs form 1040 2012 182%. Irs form 1040 2012 That year's depreciation deduction is $5,091 ($160,000 x . Irs form 1040 2012 03182). Irs form 1040 2012 Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Irs form 1040 2012 See Appendix B in Publication 946 for other property. Irs form 1040 2012 If your property is not listed in Appendix B, it is considered to have no class life. Irs form 1040 2012 Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Irs form 1040 2012 Use the mid-month convention for residential rental property and nonresidential real property. Irs form 1040 2012 For all other property, use the half-year or mid-quarter convention, as appropriate. Irs form 1040 2012 See Publication 946 for ADS depreciation tables. Irs form 1040 2012 Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Irs form 1040 2012 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. Irs form 1040 2012 For more information, see Depreciation under Decreases to Basis in Publication 551. Irs form 1040 2012 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. Irs form 1040 2012 S. Irs form 1040 2012 Individual Income Tax Return. Irs form 1040 2012 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. Irs form 1040 2012 Filing an amended return. Irs form 1040 2012   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Irs form 1040 2012 You claimed the incorrect amount because of a mathematical error made in any year. Irs form 1040 2012 You claimed the incorrect amount because of a posting error made in any year. Irs form 1040 2012 You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Irs form 1040 2012 You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Irs form 1040 2012   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. Irs form 1040 2012 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. Irs form 1040 2012   If an amended return is allowed, you must file it by the later of the following dates. Irs form 1040 2012 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Irs form 1040 2012 A return filed before an unextended due date is considered filed on that due date. Irs form 1040 2012 2 years from the time you paid your tax for that year. Irs form 1040 2012 Changing your accounting method. Irs form 1040 2012   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Irs form 1040 2012 In some instances, that consent is automatic. Irs form 1040 2012 For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Irs form 1040 2012 Prev  Up  Next   Home   More Online Publications
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Understanding your CP180/CP181 Notice

We sent you this notice because your tax return is missing a schedule or form.


What you need to do

  • Read the notice carefully to determine the required schedule or form needed to complete your return.
  • Download the required schedule or form or call 1-800-829-3676.
  • Fill out the Contact Information section of the notice, detach, and send it to us with your completed schedule or form so we receive it by the date indicated on the notice.

You may want to...

  • Review the filing requirements and instructions for the missing schedule or form to determine whether your organization needs to file.
  • Review your records to ensure all applicable schedules and forms were attached when filed.

Answers to Common Questions

What happens if I don't respond by the due date?
If you don't respond by the due date of the notice, your tax and/or credits may be adjusted which may result in a balance due.

Who do I call for assistance?
For assistance with your business return, call 1-800-829-0115 or, for assistance with Form 990-T, call 1-877-829-5500.


Tips for next year

Refer to the instructions for your tax return for required documentation. Attach all required forms and schedules to your tax return when filing.

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.


Understanding your notice

Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

CP180

Notice CP180, Page 1
 

Notice CP180, Page 2
 

CP181

Notice CP181, Page 1
 

Notice CP181, Page 2
 

Page Last Reviewed or Updated: 01-Jul-2013

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
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The Irs Form 1040 2012

Irs form 1040 2012 Publication 598 - Additional Material Prev  Up  Next   Home   More Online Publications