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Efile State Tax

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Efile State Tax

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

Efile state tax Publication 542 - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Photographs of missing children. Efile state tax  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Efile state tax Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Efile state tax You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Efile state tax Introduction This publication discusses the general tax laws that apply to ordinary domestic corporations. Efile state tax It explains the tax law in plain language so it will be easier to understand. Efile state tax However, the information given does not cover every situation and is not intended to replace the law or change its meaning. Efile state tax Note. Efile state tax This publication is not revised on an annual basis. Efile state tax To find changes that may affect current year returns, see the instructions for your income tax return for the current year; and Changes to Current Forms and Publications at www. Efile state tax irs. Efile state tax gov/formspubs. Efile state tax Comments and suggestions. Efile state tax   We welcome your comments about this publication and your suggestions for future editions. Efile state tax   You can write to us at the following address: Internal Revenue Service Business, Exempt Organizations and International Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Efile state tax NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Efile state tax Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Efile state tax   You can email us at *taxforms@irs. Efile state tax gov (The asterisk must be included in the address). Efile state tax Please put “Publications Comment” on the subject line. Efile state tax You can also send us comments at www. Efile state tax irs. Efile state tax gov/formspubs/. Efile state tax Select “Comment on Tax Forms and Publications” under “Information about. Efile state tax ” Although we cannot respond individually to each comment, we do appreciate your feedback and will consider your comments as we revise our tax products. Efile state tax Tax questions. Efile state tax   If you have a tax question, visit IRS. Efile state tax gov or call 1-800-829-1040. Efile state tax We cannot answer tax questions at either of the addresses listed above. Efile state tax Ordering forms and publications. Efile state tax   Visit www. Efile state tax irs. Efile state tax gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the address shown under How to Get Tax Help, later in this publication. Efile state tax Additional forms. Efile state tax   A list of other forms and statements that a corporation may need to file is included at the end of this publication. Efile state tax Useful Items - You may want to see: Publication 510 Excise Taxes (Including Fuel Tax Credits and Refunds) 535 Business Expenses 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 925 Passive Activity and At-Risk Rules 946 How to Depreciate Property Prev  Up  Next   Home   More Online Publications