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How To File 2011 Income Tax

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How To File 2011 Income Tax

How to file 2011 income tax 2. How to file 2011 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. How to file 2011 income tax You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. How to file 2011 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. How to file 2011 income tax You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. How to file 2011 income tax You can deduct depreciation only on the part of your property used for rental purposes. How to file 2011 income tax Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. How to file 2011 income tax You may have to use Form 4562 to figure and report your depreciation. How to file 2011 income tax See Which Forms To Use in chapter 3. How to file 2011 income tax Also see Publication 946. How to file 2011 income tax Section 179 deduction. How to file 2011 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. How to file 2011 income tax This deduction is not allowed for property used in connection with residential rental property. How to file 2011 income tax See chapter 2 of Publication 946. How to file 2011 income tax Alternative minimum tax (AMT). How to file 2011 income tax   If you use accelerated depreciation, you may be subject to the AMT. How to file 2011 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). How to file 2011 income tax   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. How to file 2011 income tax However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). How to file 2011 income tax   To find out if you are subject to the AMT, see the Instructions for Form 6251. How to file 2011 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. How to file 2011 income tax What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. How to file 2011 income tax You own the property. How to file 2011 income tax You use the property in your business or income-producing activity (such as rental property). How to file 2011 income tax The property has a determinable useful life. How to file 2011 income tax The property is expected to last more than one year. How to file 2011 income tax Property you own. How to file 2011 income tax   To claim depreciation, you usually must be the owner of the property. How to file 2011 income tax You are considered as owning property even if it is subject to a debt. How to file 2011 income tax Rented property. How to file 2011 income tax   Generally, if you pay rent for property, you cannot depreciate that property. How to file 2011 income tax Usually, only the owner can depreciate it. How to file 2011 income tax However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. How to file 2011 income tax See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. How to file 2011 income tax Cooperative apartments. How to file 2011 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. How to file 2011 income tax See chapter 4, Special Situations. How to file 2011 income tax Property having a determinable useful life. How to file 2011 income tax   To be depreciable, your property must have a determinable useful life. How to file 2011 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. How to file 2011 income tax What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. How to file 2011 income tax This includes land and certain excepted property. How to file 2011 income tax Land. How to file 2011 income tax   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. How to file 2011 income tax But if it does, the loss is accounted for upon disposition. How to file 2011 income tax The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. How to file 2011 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. How to file 2011 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. How to file 2011 income tax Example. How to file 2011 income tax You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. How to file 2011 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. How to file 2011 income tax If you replace the house, you would have to destroy the bushes and trees right next to it. How to file 2011 income tax These bushes and trees are closely associated with the house, so they have a determinable useful life. How to file 2011 income tax Therefore, you can depreciate them. How to file 2011 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. How to file 2011 income tax Excepted property. How to file 2011 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. How to file 2011 income tax Property placed in service and disposed of (or taken out of business use) in the same year. How to file 2011 income tax Equipment used to build capital improvements. How to file 2011 income tax You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. How to file 2011 income tax For more information, see chapter 1 of Publication 946. How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 income tax Even if you are not using the property, it is in service when it is ready and available for its specific use. How to file 2011 income tax Example 1. How to file 2011 income tax On November 22 of last year, you purchased a dishwasher for your rental property. How to file 2011 income tax The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. How to file 2011 income tax Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. How to file 2011 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. How to file 2011 income tax Example 2. How to file 2011 income tax On April 6, you purchased a house to use as residential rental property. How to file 2011 income tax You made extensive repairs to the house and had it ready for rent on July 5. How to file 2011 income tax You began to advertise the house for rent in July and actually rented it beginning September 1. How to file 2011 income tax The house is considered placed in service in July when it was ready and available for rent. How to file 2011 income tax You can begin to depreciate the house in July. How to file 2011 income tax Example 3. How to file 2011 income tax You moved from your home in July. How to file 2011 income tax During August and September you made several repairs to the house. How to file 2011 income tax On October 1, you listed the property for rent with a real estate company, which rented it on December 1. How to file 2011 income tax The property is considered placed in service on October 1, the date when it was available for rent. How to file 2011 income tax Conversion to business use. How to file 2011 income tax   If you place property in service in a personal activity, you cannot claim depreciation. How to file 2011 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. How to file 2011 income tax You place the property in service for business or income-producing use on the date of the change. How to file 2011 income tax Example. How to file 2011 income tax You bought a house and used it as your personal home several years before you converted it to rental property. How to file 2011 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. How to file 2011 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. How to file 2011 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). How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 income tax See Basis of Depreciable Property , later. How to file 2011 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. How to file 2011 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. How to file 2011 income tax You sell or exchange the property. How to file 2011 income tax You convert the property to personal use. How to file 2011 income tax You abandon the property. How to file 2011 income tax The property is destroyed. How to file 2011 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. How to file 2011 income tax If you placed rental property in service before 1987, you are using one of the following methods. How to file 2011 income tax ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. How to file 2011 income tax Straight line or declining balance method over the useful life of property placed in service before 1981. How to file 2011 income tax See MACRS Depreciation , later, for more information. How to file 2011 income tax Rental property placed in service before 2013. How to file 2011 income tax   Continue to use the same method of figuring depreciation that you used in the past. How to file 2011 income tax Use of real property changed. How to file 2011 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. How to file 2011 income tax This includes your residence that you changed to rental use. How to file 2011 income tax See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. How to file 2011 income tax Improvements made after 1986. How to file 2011 income tax   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. How to file 2011 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. How to file 2011 income tax For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. How to file 2011 income tax This publication discusses MACRS depreciation only. How to file 2011 income tax If you need information about depreciating property placed in service before 1987, see Publication 534. How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 income tax Basis and adjusted basis are explained in the following discussions. How to file 2011 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. How to file 2011 income tax See Basis of Property Changed to Rental Use in chapter 4. How to file 2011 income tax Cost Basis The basis of property you buy is usually its cost. How to file 2011 income tax The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. How to file 2011 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. How to file 2011 income tax Exception. How to file 2011 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. How to file 2011 income tax Such taxes were deductible before 1987 and after 2003. How to file 2011 income tax Loans with low or no interest. How to file 2011 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. How to file 2011 income tax See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. How to file 2011 income tax Real property. How to file 2011 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. How to file 2011 income tax Real estate taxes. How to file 2011 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. How to file 2011 income tax You cannot deduct them as taxes paid. How to file 2011 income tax   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. How to file 2011 income tax Do not include that amount in your basis in the property. How to file 2011 income tax Settlement fees and other costs. How to file 2011 income tax   The following settlement fees and closing costs for buying the property are part of your basis in the property. How to file 2011 income tax Abstract fees. How to file 2011 income tax Charges for installing utility services. How to file 2011 income tax Legal fees. How to file 2011 income tax Recording fees. How to file 2011 income tax Surveys. How to file 2011 income tax Transfer taxes. How to file 2011 income tax Title insurance. How to file 2011 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. How to file 2011 income tax   The following are settlement fees and closing costs you cannot include in your basis in the property. How to file 2011 income tax Fire insurance premiums. How to file 2011 income tax Rent or other charges relating to occupancy of the property before closing. How to file 2011 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. How to file 2011 income tax   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. How to file 2011 income tax Assumption of a mortgage. How to file 2011 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. How to file 2011 income tax Example. How to file 2011 income tax You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. How to file 2011 income tax Your basis is $300,000. How to file 2011 income tax Separating cost of land and buildings. How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 income tax Example. How to file 2011 income tax You buy a house and land for $200,000. How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 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). How to file 2011 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. How to file 2011 income tax If you received property in one of these ways, see Publication 551 for information on how to figure your basis. How to file 2011 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. How to file 2011 income tax The result of these adjustments to the basis is the adjusted basis. How to file 2011 income tax Increases to basis. How to file 2011 income tax   You must increase the basis of any property by the cost of all items properly added to a capital account. How to file 2011 income tax These include the following. How to file 2011 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. How to file 2011 income tax Amounts spent after a casualty to restore the damaged property. How to file 2011 income tax The cost of extending utility service lines to the property. How to file 2011 income tax Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. How to file 2011 income tax Additions or improvements. How to file 2011 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. How to file 2011 income tax This includes all direct costs, such as material and labor, but does not include your own labor. How to file 2011 income tax It also includes all expenses related to the addition or improvement. How to file 2011 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. How to file 2011 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. How to file 2011 income tax   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. How to file 2011 income tax For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. How to file 2011 income tax    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. How to file 2011 income tax However, see What Rental Property Cannot Be Depreciated, earlier. How to file 2011 income tax Assessments for local improvements. How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 income tax You cannot deduct these items as taxes or depreciate them. How to file 2011 income tax    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. How to file 2011 income tax Do not add them to your basis in the property. How to file 2011 income tax Deducting vs. How to file 2011 income tax capitalizing costs. How to file 2011 income tax   Do not add to your basis costs you can deduct as current expenses. How to file 2011 income tax However, there are certain costs you can choose either to deduct or to capitalize. How to file 2011 income tax If you capitalize these costs, include them in your basis. How to file 2011 income tax If you deduct them, do not include them in your basis. How to file 2011 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. How to file 2011 income tax   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. How to file 2011 income tax Decreases to basis. How to file 2011 income tax   You must decrease the basis of your property by any items that represent a return of your cost. How to file 2011 income tax These include the following. How to file 2011 income tax Insurance or other payment you receive as the result of a casualty or theft loss. How to file 2011 income tax Casualty loss not covered by insurance for which you took a deduction. How to file 2011 income tax Amount(s) you receive for granting an easement. How to file 2011 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. How to file 2011 income tax Exclusion from income of subsidies for energy conservation measures. How to file 2011 income tax Special depreciation allowance claimed on qualified property. How to file 2011 income tax Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. How to file 2011 income tax If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. How to file 2011 income tax   If your rental property was previously used as your main home, you must also decrease the basis by the following. How to file 2011 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. How to file 2011 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. How to file 2011 income tax Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. How to file 2011 income tax Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. How to file 2011 income tax This allowance is figured before you figure your regular depreciation deduction. How to file 2011 income tax See Publication 946, chapter 3, for details. How to file 2011 income tax Also see the Instructions for Form 4562, Line 14. How to file 2011 income tax If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. How to file 2011 income tax The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. How to file 2011 income tax MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. How to file 2011 income tax This section explains how to determine which MACRS depreciation system applies to your property. How to file 2011 income tax It also discusses other information you need to know before you can figure depreciation under MACRS. How to file 2011 income tax This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. How to file 2011 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). How to file 2011 income tax You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 income tax For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. How to file 2011 income tax Electing ADS If you choose, you can use the ADS method for most property. How to file 2011 income tax Under ADS, you use the straight line method of depreciation. How to file 2011 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. How to file 2011 income tax However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. How to file 2011 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. How to file 2011 income tax Once you make this election, you can never revoke it. How to file 2011 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. How to file 2011 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. How to file 2011 income tax The property class generally determines the depreciation method, recovery period, and convention. How to file 2011 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. How to file 2011 income tax Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. How to file 2011 income tax 5-year property. How to file 2011 income tax This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. How to file 2011 income tax ), automobiles, and light trucks. How to file 2011 income tax This class also includes appliances, carpeting, furniture, etc. How to file 2011 income tax , used in a residential rental real estate activity. How to file 2011 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. How to file 2011 income tax See chapter 5 of Publication 946. How to file 2011 income tax 7-year property. How to file 2011 income tax This class includes office furniture and equipment (desks, file cabinets, etc. How to file 2011 income tax ). How to file 2011 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. How to file 2011 income tax 15-year property. How to file 2011 income tax This class includes roads, fences, and shrubbery (if depreciable). How to file 2011 income tax Residential rental property. How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 income tax The other property classes do not generally apply to property used in rental activities. How to file 2011 income tax These classes are not discussed in this publication. How to file 2011 income tax See Publication 946 for more information. How to file 2011 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. How to file 2011 income tax The recovery periods are generally longer under ADS than GDS. How to file 2011 income tax The recovery period of property depends on its property class. How to file 2011 income tax Under GDS, the recovery period of an asset is generally the same as its property class. How to file 2011 income tax Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. How to file 2011 income tax See Table 2-1 for recovery periods of property commonly used in residential rental activities. How to file 2011 income tax Qualified Indian reservation property. How to file 2011 income tax   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. How to file 2011 income tax For more information, see chapter 4 of Publication 946. How to file 2011 income tax Additions or improvements to property. How to file 2011 income tax   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. How to file 2011 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. How to file 2011 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. How to file 2011 income tax Example. How to file 2011 income tax You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. How to file 2011 income tax You built an addition onto the house and placed it in service in 2013. How to file 2011 income tax You must use MACRS for the addition. How to file 2011 income tax Under GDS, the addition is depreciated as residential rental property over 27. How to file 2011 income tax 5 years. How to file 2011 income tax Table 2-1. How to file 2011 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. How to file 2011 income tax 27. How to file 2011 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. How to file 2011 income tax   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. How to file 2011 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. How to file 2011 income tax Mid-month convention. How to file 2011 income tax    A mid-month convention is used for all residential rental property and nonresidential real property. How to file 2011 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. How to file 2011 income tax Mid-quarter convention. How to file 2011 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. How to file 2011 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. How to file 2011 income tax Example. How to file 2011 income tax During the tax year, Tom Martin purchased the following items to use in his rental property. How to file 2011 income tax He elects not to claim the special depreciation allowance discussed earlier. How to file 2011 income tax A dishwasher for $400 that he placed in service in January. How to file 2011 income tax Used furniture for $100 that he placed in service in September. How to file 2011 income tax A refrigerator for $800 that he placed in service in October. How to file 2011 income tax Tom uses the calendar year as his tax year. How to file 2011 income tax The total basis of all property placed in service that year is $1,300. How to file 2011 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). How to file 2011 income tax Tom must use the mid-quarter convention instead of the half-year convention for all three items. How to file 2011 income tax Half-year convention. How to file 2011 income tax    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. How to file 2011 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. How to file 2011 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. How to file 2011 income tax You deduct a full year of depreciation for any other year during the recovery period. How to file 2011 income tax Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. How to file 2011 income tax The deduction is substantially the same both ways. How to file 2011 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. How to file 2011 income tax In this publication we will use the percentage tables. How to file 2011 income tax For instructions on how to compute the deduction, see chapter 4 of Publication 946. How to file 2011 income tax Residential rental property. How to file 2011 income tax   You must use the straight line method and a mid-month convention for residential rental property. How to file 2011 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). How to file 2011 income tax 5-, 7-, or 15-year property. How to file 2011 income tax   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. How to file 2011 income tax However, in limited cases you must use the mid-quarter convention, if it applies. How to file 2011 income tax For property in the 15-year class, use the 150% declining balance method and a half-year convention. How to file 2011 income tax   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. How to file 2011 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. How to file 2011 income tax You make this election on Form 4562. How to file 2011 income tax In Part III, column (f), enter “150 DB. How to file 2011 income tax ” Once you make this election, you cannot change to another method. How to file 2011 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. How to file 2011 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. How to file 2011 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. How to file 2011 income tax You elect the straight line method on Form 4562. How to file 2011 income tax In Part III, column (f), enter “S/L. How to file 2011 income tax ” Once you make this election, you cannot change to another method. How to file 2011 income tax MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. How to file 2011 income tax The tables show the percentages for the first few years or until the change to the straight line method is made. How to file 2011 income tax See Appendix A of Publication 946 for complete tables. How to file 2011 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. How to file 2011 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. How to file 2011 income tax How to use the percentage tables. How to file 2011 income tax   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. How to file 2011 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. How to file 2011 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. How to file 2011 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 . How to file 2011 income tax See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. How to file 2011 income tax Unadjusted basis. How to file 2011 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. How to file 2011 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. How to file 2011 income tax For more information, see chapter 4 of Publication 946. How to file 2011 income tax Please click here for the text description of the image. How to file 2011 income tax Table 2-2 Tables 2-2a, 2-2b, and 2-2c. How to file 2011 income tax   The percentages in these tables take into account the half-year and mid-quarter conventions. How to file 2011 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. How to file 2011 income tax Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). How to file 2011 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. How to file 2011 income tax Example 1. How to file 2011 income tax You purchased a stove and refrigerator and placed them in service in June. How to file 2011 income tax Your basis in the stove is $600 and your basis in the refrigerator is $1,000. How to file 2011 income tax Both are 5-year property. How to file 2011 income tax Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. How to file 2011 income tax For that year your depreciation deduction is $120 ($600 × . How to file 2011 income tax 20) for the stove and $200 ($1,000 × . How to file 2011 income tax 20) for the refrigerator. How to file 2011 income tax For Year 2, the depreciation percentage is 32%. How to file 2011 income tax That year's depreciation deduction will be $192 ($600 × . How to file 2011 income tax 32) for the stove and $320 ($1,000 × . How to file 2011 income tax 32) for the refrigerator. How to file 2011 income tax Example 2. How to file 2011 income tax Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. How to file 2011 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 × . How to file 2011 income tax 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. How to file 2011 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%. How to file 2011 income tax Your depreciation deduction for the refrigerator is $50 ($1,000 x . How to file 2011 income tax 05). How to file 2011 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%. How to file 2011 income tax For that year, your depreciation deduction for the stove is $150 ($600 x . How to file 2011 income tax 25). How to file 2011 income tax Table 2-2d. How to file 2011 income tax    Use this table when you are using the GDS 27. How to file 2011 income tax 5 year option for residential rental property. How to file 2011 income tax Find the row for the month that you placed the property in service. How to file 2011 income tax Use the percentages listed for that month to figure your depreciation deduction. How to file 2011 income tax The mid-month convention is taken into account in the percentages shown in the table. How to file 2011 income tax Continue to use the same row (month) under the column for the appropriate year. How to file 2011 income tax Example. How to file 2011 income tax You purchased a single family rental house for $185,000 and placed it in service on February 8. How to file 2011 income tax The sales contract showed that the building cost $160,000 and the land cost $25,000. How to file 2011 income tax Your basis for depreciation is its original cost, $160,000. How to file 2011 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. How to file 2011 income tax 5 years. How to file 2011 income tax Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. How to file 2011 income tax 182%. How to file 2011 income tax That year's depreciation deduction is $5,091 ($160,000 x . How to file 2011 income tax 03182). How to file 2011 income tax Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. How to file 2011 income tax See Appendix B in Publication 946 for other property. How to file 2011 income tax If your property is not listed in Appendix B, it is considered to have no class life. How to file 2011 income tax Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. How to file 2011 income tax Use the mid-month convention for residential rental property and nonresidential real property. How to file 2011 income tax For all other property, use the half-year or mid-quarter convention, as appropriate. How to file 2011 income tax See Publication 946 for ADS depreciation tables. How to file 2011 income tax Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. How to file 2011 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. How to file 2011 income tax For more information, see Depreciation under Decreases to Basis in Publication 551. How to file 2011 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. How to file 2011 income tax S. How to file 2011 income tax Individual Income Tax Return. How to file 2011 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. How to file 2011 income tax Filing an amended return. How to file 2011 income tax   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. How to file 2011 income tax You claimed the incorrect amount because of a mathematical error made in any year. How to file 2011 income tax You claimed the incorrect amount because of a posting error made in any year. How to file 2011 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. How to file 2011 income tax You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. How to file 2011 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. How to file 2011 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. How to file 2011 income tax   If an amended return is allowed, you must file it by the later of the following dates. How to file 2011 income tax 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. How to file 2011 income tax A return filed before an unextended due date is considered filed on that due date. How to file 2011 income tax 2 years from the time you paid your tax for that year. How to file 2011 income tax Changing your accounting method. How to file 2011 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. How to file 2011 income tax In some instances, that consent is automatic. How to file 2011 income tax For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. How to file 2011 income tax Prev  Up  Next   Home   More Online Publications
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