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