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Ri 1040nr Publication 1542 - Introductory Material Table of Contents What's New IntroductionOrdering forms and publications. Ri 1040nr Tax questions. Ri 1040nr What's New Future developments. Ri 1040nr  The IRS has created a page on IRS. Ri 1040nr gov for information about Publication 1542, at www. Ri 1040nr irs. Ri 1040nr gov/pub1542. Ri 1040nr Information about any future developments affecting Publication 1542 (such as legislation enacted after we release it) will be posted on that page. Ri 1040nr Introduction This publication is for employers who pay a per diem allowance to employees for business travel away from home within the continental United States (CONUS) (the 48 contiguous states), on or after October 1, 2010, and before January 1, 2011. Ri 1040nr It gives the maximum per diem rate you can use without treating part of the per diem allowance as wages for tax purposes. Ri 1040nr For a detailed discussion on the tax treatment of a per diem allowance, see chapter 11 of Publication 535, Business Expenses, or Revenue Procedure 2011-47, 2011-42 I. Ri 1040nr R. Ri 1040nr B. Ri 1040nr 520, which can be found on the Internet at www. Ri 1040nr irs. Ri 1040nr gov/irb/2011-42_IRB/ar12. Ri 1040nr html. Ri 1040nr Per diem rates on the Internet. Ri 1040nr   You will find links to per diem rates at www. Ri 1040nr gsa. Ri 1040nr gov/perdiem, including links to: CONUS per diem rates; Per diem rates for areas outside the continental United States (OCONUS), such as Alaska, Hawaii, Puerto Rico, and U. Ri 1040nr S. Ri 1040nr possessions; and Foreign per diem rates. Ri 1040nr Publication 1542 revisions. Ri 1040nr   Publication 1542 is available only on the Internet at IRS. Ri 1040nr gov. Ri 1040nr Print copies can no longer be ordered. Ri 1040nr   During the year, as changes to the federal per diem rates (updates) are announced by the General Services Administration (GSA), we will incorporate the changes into Publication 1542. Ri 1040nr An article on IRS. Ri 1040nr gov will alert you to which locations have updated rates. Ri 1040nr To reach these articles, go to www. Ri 1040nr irs. Ri 1040nr gov/formspubs and click on “Changes to Current Tax Products,” under Important Changes. Ri 1040nr You will find the new rates in Table 4. Ri 1040nr   We will also incorporate mid-year changes to the high-low rates into Publication 1542. Ri 1040nr You will be alerted to these changes by a similar article on IRS. Ri 1040nr gov and can find the changes in Table 2 of the revised publication. Ri 1040nr   The annual changes, both federal per diem and high-low rates, will be incorporated into the publication as soon as possible after being announced by GSA and the IRS. Ri 1040nr The annual issue of the publication should be available each year in mid- to late-October. Ri 1040nr Comments and suggestions. Ri 1040nr   We welcome your comments about this publication and your suggestions for future editions. Ri 1040nr   You can write to us at the following address: Internal Revenue Service Individual Forms and Publications Branch SE:W:CAR:MP:T:I 1111 Constitution Ave. Ri 1040nr NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Ri 1040nr Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Ri 1040nr   You can email us at taxforms@irs. Ri 1040nr gov. Ri 1040nr Please put “Publications Comment” on the subject line. Ri 1040nr You can also send us comments from www. Ri 1040nr irs. Ri 1040nr gov/formspubs/, select “Comment on Tax Forms and Publications” under “Information about. Ri 1040nr ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Ri 1040nr Ordering forms and publications. Ri 1040nr   Visit www. Ri 1040nr irs. Ri 1040nr gov/formspubs/ to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received. Ri 1040nr Internal Revenue Service 1201 N. Ri 1040nr Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Ri 1040nr   If you have a tax question, check the information available on IRS. Ri 1040nr gov or call 1-800-829-1040. Ri 1040nr We cannot answer tax questions sent to either of the above addresses. Ri 1040nr Prev  Up  Next   Home   More Online Publications
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  • Auto Auction Fraud
    The Internet Crime Complain Center has received a significant number of recent complaints regarding Internet auction fraud involving the sale of automobiles purported to be located outside of the United States. The typical fraud involves an auction for a vehicle said to be in Europe, and for which the buyer pays with Western Union or other wire transfer mechanism. The buyer does not receive his or her automobile in these auctions, and the money is not recoverable.
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Ri 1040nr 2. Ri 1040nr   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. Ri 1040nr You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Ri 1040nr 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. Ri 1040nr You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Ri 1040nr You can deduct depreciation only on the part of your property used for rental purposes. Ri 1040nr Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Ri 1040nr You may have to use Form 4562 to figure and report your depreciation. Ri 1040nr See Which Forms To Use in chapter 3. Ri 1040nr Also see Publication 946. Ri 1040nr Section 179 deduction. Ri 1040nr   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. Ri 1040nr This deduction is not allowed for property used in connection with residential rental property. Ri 1040nr See chapter 2 of Publication 946. Ri 1040nr Alternative minimum tax (AMT). Ri 1040nr   If you use accelerated depreciation, you may be subject to the AMT. Ri 1040nr 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). Ri 1040nr   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Ri 1040nr However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Ri 1040nr   To find out if you are subject to the AMT, see the Instructions for Form 6251. Ri 1040nr 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. Ri 1040nr What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Ri 1040nr You own the property. Ri 1040nr You use the property in your business or income-producing activity (such as rental property). Ri 1040nr The property has a determinable useful life. Ri 1040nr The property is expected to last more than one year. Ri 1040nr Property you own. Ri 1040nr   To claim depreciation, you usually must be the owner of the property. Ri 1040nr You are considered as owning property even if it is subject to a debt. Ri 1040nr Rented property. Ri 1040nr   Generally, if you pay rent for property, you cannot depreciate that property. Ri 1040nr Usually, only the owner can depreciate it. Ri 1040nr However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Ri 1040nr See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Ri 1040nr Cooperative apartments. Ri 1040nr   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. Ri 1040nr See chapter 4, Special Situations. Ri 1040nr Property having a determinable useful life. Ri 1040nr   To be depreciable, your property must have a determinable useful life. Ri 1040nr This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Ri 1040nr What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Ri 1040nr This includes land and certain excepted property. Ri 1040nr Land. Ri 1040nr   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Ri 1040nr But if it does, the loss is accounted for upon disposition. Ri 1040nr The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Ri 1040nr   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Ri 1040nr 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. Ri 1040nr Example. Ri 1040nr You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Ri 1040nr Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Ri 1040nr If you replace the house, you would have to destroy the bushes and trees right next to it. Ri 1040nr These bushes and trees are closely associated with the house, so they have a determinable useful life. Ri 1040nr Therefore, you can depreciate them. Ri 1040nr Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Ri 1040nr Excepted property. Ri 1040nr   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Ri 1040nr Property placed in service and disposed of (or taken out of business use) in the same year. Ri 1040nr Equipment used to build capital improvements. Ri 1040nr You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Ri 1040nr For more information, see chapter 1 of Publication 946. Ri 1040nr When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr Even if you are not using the property, it is in service when it is ready and available for its specific use. Ri 1040nr Example 1. Ri 1040nr On November 22 of last year, you purchased a dishwasher for your rental property. Ri 1040nr The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Ri 1040nr Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Ri 1040nr 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. Ri 1040nr Example 2. Ri 1040nr On April 6, you purchased a house to use as residential rental property. Ri 1040nr You made extensive repairs to the house and had it ready for rent on July 5. Ri 1040nr You began to advertise the house for rent in July and actually rented it beginning September 1. Ri 1040nr The house is considered placed in service in July when it was ready and available for rent. Ri 1040nr You can begin to depreciate the house in July. Ri 1040nr Example 3. Ri 1040nr You moved from your home in July. Ri 1040nr During August and September you made several repairs to the house. Ri 1040nr On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Ri 1040nr The property is considered placed in service on October 1, the date when it was available for rent. Ri 1040nr Conversion to business use. Ri 1040nr   If you place property in service in a personal activity, you cannot claim depreciation. Ri 1040nr 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. Ri 1040nr You place the property in service for business or income-producing use on the date of the change. Ri 1040nr Example. Ri 1040nr You bought a house and used it as your personal home several years before you converted it to rental property. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr 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). Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Ri 1040nr See Basis of Depreciable Property , later. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr You sell or exchange the property. Ri 1040nr You convert the property to personal use. Ri 1040nr You abandon the property. Ri 1040nr The property is destroyed. Ri 1040nr Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Ri 1040nr If you placed rental property in service before 1987, you are using one of the following methods. Ri 1040nr ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Ri 1040nr Straight line or declining balance method over the useful life of property placed in service before 1981. Ri 1040nr See MACRS Depreciation , later, for more information. Ri 1040nr Rental property placed in service before 2013. Ri 1040nr   Continue to use the same method of figuring depreciation that you used in the past. Ri 1040nr Use of real property changed. Ri 1040nr   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. Ri 1040nr This includes your residence that you changed to rental use. Ri 1040nr See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Ri 1040nr Improvements made after 1986. Ri 1040nr   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Ri 1040nr 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. Ri 1040nr For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Ri 1040nr This publication discusses MACRS depreciation only. Ri 1040nr If you need information about depreciating property placed in service before 1987, see Publication 534. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr Basis and adjusted basis are explained in the following discussions. Ri 1040nr 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. Ri 1040nr See Basis of Property Changed to Rental Use in chapter 4. Ri 1040nr Cost Basis The basis of property you buy is usually its cost. Ri 1040nr The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Ri 1040nr 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. Ri 1040nr Exception. Ri 1040nr   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. Ri 1040nr Such taxes were deductible before 1987 and after 2003. Ri 1040nr Loans with low or no interest. Ri 1040nr   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. Ri 1040nr See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Ri 1040nr Real property. Ri 1040nr   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. Ri 1040nr Real estate taxes. Ri 1040nr   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. Ri 1040nr You cannot deduct them as taxes paid. Ri 1040nr   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Ri 1040nr Do not include that amount in your basis in the property. Ri 1040nr Settlement fees and other costs. Ri 1040nr   The following settlement fees and closing costs for buying the property are part of your basis in the property. Ri 1040nr Abstract fees. Ri 1040nr Charges for installing utility services. Ri 1040nr Legal fees. Ri 1040nr Recording fees. Ri 1040nr Surveys. Ri 1040nr Transfer taxes. Ri 1040nr Title insurance. Ri 1040nr 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. Ri 1040nr   The following are settlement fees and closing costs you cannot include in your basis in the property. Ri 1040nr Fire insurance premiums. Ri 1040nr Rent or other charges relating to occupancy of the property before closing. Ri 1040nr 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. Ri 1040nr   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Ri 1040nr Assumption of a mortgage. Ri 1040nr   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. Ri 1040nr Example. Ri 1040nr You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Ri 1040nr Your basis is $300,000. Ri 1040nr Separating cost of land and buildings. Ri 1040nr   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. Ri 1040nr 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. Ri 1040nr   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. Ri 1040nr Example. Ri 1040nr You buy a house and land for $200,000. Ri 1040nr The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr 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). Ri 1040nr 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. Ri 1040nr If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Ri 1040nr 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. Ri 1040nr The result of these adjustments to the basis is the adjusted basis. Ri 1040nr Increases to basis. Ri 1040nr   You must increase the basis of any property by the cost of all items properly added to a capital account. Ri 1040nr These include the following. Ri 1040nr 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. Ri 1040nr Amounts spent after a casualty to restore the damaged property. Ri 1040nr The cost of extending utility service lines to the property. Ri 1040nr Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Ri 1040nr Additions or improvements. Ri 1040nr   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. Ri 1040nr This includes all direct costs, such as material and labor, but does not include your own labor. Ri 1040nr It also includes all expenses related to the addition or improvement. Ri 1040nr   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. Ri 1040nr 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. Ri 1040nr   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Ri 1040nr For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Ri 1040nr    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Ri 1040nr However, see What Rental Property Cannot Be Depreciated, earlier. Ri 1040nr Assessments for local improvements. Ri 1040nr   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. Ri 1040nr 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. Ri 1040nr Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Ri 1040nr You cannot deduct these items as taxes or depreciate them. Ri 1040nr    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Ri 1040nr Do not add them to your basis in the property. Ri 1040nr Deducting vs. Ri 1040nr capitalizing costs. Ri 1040nr   Do not add to your basis costs you can deduct as current expenses. Ri 1040nr However, there are certain costs you can choose either to deduct or to capitalize. Ri 1040nr If you capitalize these costs, include them in your basis. Ri 1040nr If you deduct them, do not include them in your basis. Ri 1040nr   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Ri 1040nr   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Ri 1040nr Decreases to basis. Ri 1040nr   You must decrease the basis of your property by any items that represent a return of your cost. Ri 1040nr These include the following. Ri 1040nr Insurance or other payment you receive as the result of a casualty or theft loss. Ri 1040nr Casualty loss not covered by insurance for which you took a deduction. Ri 1040nr Amount(s) you receive for granting an easement. Ri 1040nr 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. Ri 1040nr Exclusion from income of subsidies for energy conservation measures. Ri 1040nr Special depreciation allowance claimed on qualified property. Ri 1040nr Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Ri 1040nr If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Ri 1040nr   If your rental property was previously used as your main home, you must also decrease the basis by the following. Ri 1040nr Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Ri 1040nr District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Ri 1040nr Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Ri 1040nr Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Ri 1040nr This allowance is figured before you figure your regular depreciation deduction. Ri 1040nr See Publication 946, chapter 3, for details. Ri 1040nr Also see the Instructions for Form 4562, Line 14. Ri 1040nr If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Ri 1040nr The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Ri 1040nr MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Ri 1040nr This section explains how to determine which MACRS depreciation system applies to your property. Ri 1040nr It also discusses other information you need to know before you can figure depreciation under MACRS. Ri 1040nr This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Ri 1040nr 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). Ri 1040nr You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Ri 1040nr Electing ADS If you choose, you can use the ADS method for most property. Ri 1040nr Under ADS, you use the straight line method of depreciation. Ri 1040nr 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. Ri 1040nr However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Ri 1040nr 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. Ri 1040nr Once you make this election, you can never revoke it. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr The property class generally determines the depreciation method, recovery period, and convention. Ri 1040nr 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. Ri 1040nr Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Ri 1040nr 5-year property. Ri 1040nr This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Ri 1040nr ), automobiles, and light trucks. Ri 1040nr This class also includes appliances, carpeting, furniture, etc. Ri 1040nr , used in a residential rental real estate activity. Ri 1040nr 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. Ri 1040nr See chapter 5 of Publication 946. Ri 1040nr 7-year property. Ri 1040nr This class includes office furniture and equipment (desks, file cabinets, etc. Ri 1040nr ). Ri 1040nr 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. Ri 1040nr 15-year property. Ri 1040nr This class includes roads, fences, and shrubbery (if depreciable). Ri 1040nr Residential rental property. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr The other property classes do not generally apply to property used in rental activities. Ri 1040nr These classes are not discussed in this publication. Ri 1040nr See Publication 946 for more information. Ri 1040nr Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Ri 1040nr The recovery periods are generally longer under ADS than GDS. Ri 1040nr The recovery period of property depends on its property class. Ri 1040nr Under GDS, the recovery period of an asset is generally the same as its property class. Ri 1040nr Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Ri 1040nr See Table 2-1 for recovery periods of property commonly used in residential rental activities. Ri 1040nr Qualified Indian reservation property. Ri 1040nr   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Ri 1040nr For more information, see chapter 4 of Publication 946. Ri 1040nr Additions or improvements to property. Ri 1040nr   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Ri 1040nr   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. Ri 1040nr   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. Ri 1040nr Example. Ri 1040nr You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Ri 1040nr You built an addition onto the house and placed it in service in 2013. Ri 1040nr You must use MACRS for the addition. Ri 1040nr Under GDS, the addition is depreciated as residential rental property over 27. Ri 1040nr 5 years. Ri 1040nr Table 2-1. Ri 1040nr 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. Ri 1040nr 27. Ri 1040nr 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. Ri 1040nr   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Ri 1040nr 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. Ri 1040nr Mid-month convention. Ri 1040nr    A mid-month convention is used for all residential rental property and nonresidential real property. Ri 1040nr 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. Ri 1040nr Mid-quarter convention. Ri 1040nr   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. Ri 1040nr   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. Ri 1040nr Example. Ri 1040nr During the tax year, Tom Martin purchased the following items to use in his rental property. Ri 1040nr He elects not to claim the special depreciation allowance discussed earlier. Ri 1040nr A dishwasher for $400 that he placed in service in January. Ri 1040nr Used furniture for $100 that he placed in service in September. Ri 1040nr A refrigerator for $800 that he placed in service in October. Ri 1040nr Tom uses the calendar year as his tax year. Ri 1040nr The total basis of all property placed in service that year is $1,300. Ri 1040nr The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Ri 1040nr Tom must use the mid-quarter convention instead of the half-year convention for all three items. Ri 1040nr Half-year convention. Ri 1040nr    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Ri 1040nr 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. Ri 1040nr   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. Ri 1040nr You deduct a full year of depreciation for any other year during the recovery period. Ri 1040nr Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Ri 1040nr The deduction is substantially the same both ways. Ri 1040nr 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. Ri 1040nr In this publication we will use the percentage tables. Ri 1040nr For instructions on how to compute the deduction, see chapter 4 of Publication 946. Ri 1040nr Residential rental property. Ri 1040nr   You must use the straight line method and a mid-month convention for residential rental property. Ri 1040nr 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). Ri 1040nr 5-, 7-, or 15-year property. Ri 1040nr   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Ri 1040nr However, in limited cases you must use the mid-quarter convention, if it applies. Ri 1040nr For property in the 15-year class, use the 150% declining balance method and a half-year convention. Ri 1040nr   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Ri 1040nr 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. Ri 1040nr You make this election on Form 4562. Ri 1040nr In Part III, column (f), enter “150 DB. Ri 1040nr ” Once you make this election, you cannot change to another method. Ri 1040nr   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. Ri 1040nr   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. Ri 1040nr 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. Ri 1040nr You elect the straight line method on Form 4562. Ri 1040nr In Part III, column (f), enter “S/L. Ri 1040nr ” Once you make this election, you cannot change to another method. Ri 1040nr MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Ri 1040nr The tables show the percentages for the first few years or until the change to the straight line method is made. Ri 1040nr See Appendix A of Publication 946 for complete tables. Ri 1040nr 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. Ri 1040nr 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. Ri 1040nr How to use the percentage tables. Ri 1040nr   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Ri 1040nr   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. Ri 1040nr   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. Ri 1040nr 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 . Ri 1040nr See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Ri 1040nr Unadjusted basis. Ri 1040nr   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. Ri 1040nr   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. Ri 1040nr For more information, see chapter 4 of Publication 946. Ri 1040nr Please click here for the text description of the image. Ri 1040nr Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Ri 1040nr   The percentages in these tables take into account the half-year and mid-quarter conventions. Ri 1040nr Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Ri 1040nr Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Ri 1040nr 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. Ri 1040nr Example 1. Ri 1040nr You purchased a stove and refrigerator and placed them in service in June. Ri 1040nr Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Ri 1040nr Both are 5-year property. Ri 1040nr Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Ri 1040nr For that year your depreciation deduction is $120 ($600 × . Ri 1040nr 20) for the stove and $200 ($1,000 × . Ri 1040nr 20) for the refrigerator. Ri 1040nr For Year 2, the depreciation percentage is 32%. Ri 1040nr That year's depreciation deduction will be $192 ($600 × . Ri 1040nr 32) for the stove and $320 ($1,000 × . Ri 1040nr 32) for the refrigerator. Ri 1040nr Example 2. Ri 1040nr Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Ri 1040nr 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 × . Ri 1040nr 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Ri 1040nr 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%. Ri 1040nr Your depreciation deduction for the refrigerator is $50 ($1,000 x . Ri 1040nr 05). Ri 1040nr 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%. Ri 1040nr For that year, your depreciation deduction for the stove is $150 ($600 x . Ri 1040nr 25). Ri 1040nr Table 2-2d. Ri 1040nr    Use this table when you are using the GDS 27. Ri 1040nr 5 year option for residential rental property. Ri 1040nr Find the row for the month that you placed the property in service. Ri 1040nr Use the percentages listed for that month to figure your depreciation deduction. Ri 1040nr The mid-month convention is taken into account in the percentages shown in the table. Ri 1040nr Continue to use the same row (month) under the column for the appropriate year. Ri 1040nr Example. Ri 1040nr You purchased a single family rental house for $185,000 and placed it in service on February 8. Ri 1040nr The sales contract showed that the building cost $160,000 and the land cost $25,000. Ri 1040nr Your basis for depreciation is its original cost, $160,000. Ri 1040nr 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. Ri 1040nr 5 years. Ri 1040nr Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Ri 1040nr 182%. Ri 1040nr That year's depreciation deduction is $5,091 ($160,000 x . Ri 1040nr 03182). Ri 1040nr Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Ri 1040nr See Appendix B in Publication 946 for other property. Ri 1040nr If your property is not listed in Appendix B, it is considered to have no class life. Ri 1040nr Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Ri 1040nr Use the mid-month convention for residential rental property and nonresidential real property. Ri 1040nr For all other property, use the half-year or mid-quarter convention, as appropriate. Ri 1040nr See Publication 946 for ADS depreciation tables. Ri 1040nr Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Ri 1040nr 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. Ri 1040nr For more information, see Depreciation under Decreases to Basis in Publication 551. Ri 1040nr 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. Ri 1040nr S. Ri 1040nr Individual Income Tax Return. Ri 1040nr 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. Ri 1040nr Filing an amended return. Ri 1040nr   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Ri 1040nr You claimed the incorrect amount because of a mathematical error made in any year. Ri 1040nr You claimed the incorrect amount because of a posting error made in any year. Ri 1040nr You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Ri 1040nr You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Ri 1040nr   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. Ri 1040nr 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. Ri 1040nr   If an amended return is allowed, you must file it by the later of the following dates. Ri 1040nr 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Ri 1040nr A return filed before an unextended due date is considered filed on that due date. Ri 1040nr 2 years from the time you paid your tax for that year. Ri 1040nr Changing your accounting method. Ri 1040nr   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Ri 1040nr In some instances, that consent is automatic. Ri 1040nr For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Ri 1040nr Prev  Up  Next   Home   More Online Publications