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Volunteer Income Tax Assistance Program

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Volunteer Income Tax Assistance Program

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

Volunteer income tax assistance program Publication 584-B - Introductory Material Table of Contents What's New Introduction What's New The IRS has created a page on IRS. Volunteer income tax assistance program gov for information about Publication 584-B, at www. Volunteer income tax assistance program irs. Volunteer income tax assistance program gov/pub584b. Volunteer income tax assistance program Information about any future developments affecting Publication 584-B (such as legislation enacted after we released it) will be posted on that page. Volunteer income tax assistance program Introduction This workbook is designed to help you figure your loss on business and income-producing property in the event of a disaster, casualty, or theft. Volunteer income tax assistance program It contains schedules to help you figure the loss to your office furniture and fixtures, information systems, motor vehicles, office supplies, buildings, and equipment. Volunteer income tax assistance program These schedules, however, are for your information only. Volunteer income tax assistance program You must complete Form 4684, Casualties and Thefts, to report your loss. Volunteer income tax assistance program Prev  Up  Next   Home   More Online Publications