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