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Turbotax 2011 Free Edition

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Turbotax 2011 Free Edition

Turbotax 2011 free edition 4. Turbotax 2011 free edition   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Turbotax 2011 free edition However, the information shown on the filled-in forms is not from any actual person or scenario. Turbotax 2011 free edition Example 1—Mortgage loan modification. Turbotax 2011 free edition    In 2007, Nancy Oak bought a main home for $435,000. Turbotax 2011 free edition Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Turbotax 2011 free edition The loan was secured by the home. Turbotax 2011 free edition The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Turbotax 2011 free edition In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Turbotax 2011 free edition    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Turbotax 2011 free edition The FMV of Nancy's home at the time of the refinancing was $500,000. Turbotax 2011 free edition Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Turbotax 2011 free edition After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Turbotax 2011 free edition   In 2013, Nancy was unable to make her mortgage loan payments. Turbotax 2011 free edition On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Turbotax 2011 free edition Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Turbotax 2011 free edition   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Turbotax 2011 free edition Identifiable event code "F" appears in box 6. Turbotax 2011 free edition This box shows the reason the creditor has filed Form 1099-C. Turbotax 2011 free edition To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Turbotax 2011 free edition Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Turbotax 2011 free edition   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Turbotax 2011 free edition Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Turbotax 2011 free edition Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Turbotax 2011 free edition Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Turbotax 2011 free edition   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Turbotax 2011 free edition Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Turbotax 2011 free edition Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Turbotax 2011 free edition You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Turbotax 2011 free edition Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Turbotax 2011 free edition Please click the link to view the image. Turbotax 2011 free edition Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Turbotax 2011 free edition Please click the link to view the image. Turbotax 2011 free edition Form 1040, U. Turbotax 2011 free edition S. Turbotax 2011 free edition Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Turbotax 2011 free edition Please click the link to view the image. Turbotax 2011 free edition Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Turbotax 2011 free edition    In 2005, John and Mary Elm bought a main home for $335,000. Turbotax 2011 free edition John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Turbotax 2011 free edition The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Turbotax 2011 free edition   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Turbotax 2011 free edition Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Turbotax 2011 free edition   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Turbotax 2011 free edition Identifiable event code "D" appears in box 6. Turbotax 2011 free edition This box shows the reason the creditor has filed Form 1099-C. Turbotax 2011 free edition In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Turbotax 2011 free edition In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Turbotax 2011 free edition Their sample Form 1099-C is shown on this page. Turbotax 2011 free edition   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Turbotax 2011 free edition However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Turbotax 2011 free edition   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Turbotax 2011 free edition Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Turbotax 2011 free edition Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Turbotax 2011 free edition As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Turbotax 2011 free edition Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Turbotax 2011 free edition Thus, John and Mary leave line 10b of Form 982 blank. Turbotax 2011 free edition   John and Mary must also determine whether they have a gain or loss from the foreclosure. Turbotax 2011 free edition John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Turbotax 2011 free edition Because this loss relates to their home, it is a nondeductible loss. Turbotax 2011 free edition   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Turbotax 2011 free edition John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Turbotax 2011 free edition Please click the link to view the image. Turbotax 2011 free edition Form 1099-C, Cancellation of Debt Table 1-1. Turbotax 2011 free edition Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Turbotax 2011 free edition Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Turbotax 2011 free edition Otherwise, go to Part 2. Turbotax 2011 free edition 1. Turbotax 2011 free edition Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Turbotax 2011 free edition 00 2. Turbotax 2011 free edition Enter the fair market value of the transferred property $290,000. Turbotax 2011 free edition 00 3. Turbotax 2011 free edition Ordinary income from the cancellation of debt upon foreclosure or repossession. Turbotax 2011 free edition * Subtract line 2 from line 1. Turbotax 2011 free edition If less than zero, enter zero. Turbotax 2011 free edition Next, go to Part 2 $ 25,000. Turbotax 2011 free edition 00 Part 2. Turbotax 2011 free edition Gain or loss from foreclosure or repossession. Turbotax 2011 free edition   4. Turbotax 2011 free edition Enter the smaller of line 1 or line 2. Turbotax 2011 free edition If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Turbotax 2011 free edition 00 5. Turbotax 2011 free edition Enter any proceeds you received from the foreclosure sale   6. Turbotax 2011 free edition Add line 4 and line 5 $290,000. Turbotax 2011 free edition 00 7. Turbotax 2011 free edition Enter the adjusted basis of the transferred property $335,000. Turbotax 2011 free edition 00 8. Turbotax 2011 free edition Gain or loss from foreclosure or repossession. Turbotax 2011 free edition Subtract line 7 from line 6 ($ 45,000. Turbotax 2011 free edition 00) * The income may not be taxable. Turbotax 2011 free edition See chapter 1 for more details. Turbotax 2011 free edition Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Turbotax 2011 free edition Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Turbotax 2011 free edition Credit card debt $ 5,500 2. Turbotax 2011 free edition Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Turbotax 2011 free edition Car and other vehicle loans $ 4. Turbotax 2011 free edition Medical bills owed $ 5. Turbotax 2011 free edition Student loans $ 6. Turbotax 2011 free edition Accrued or past-due mortgage interest $ 7. Turbotax 2011 free edition Accrued or past-due real estate taxes $ 8. Turbotax 2011 free edition Accrued or past-due utilities (water, gas, electric) $ 9. Turbotax 2011 free edition Accrued or past-due child care costs $ 10. Turbotax 2011 free edition Federal or state income taxes remaining due (for prior tax years) $ 11. Turbotax 2011 free edition Judgments $ 12. Turbotax 2011 free edition Business debts (including those owed as a sole proprietor or partner) $ 13. Turbotax 2011 free edition Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Turbotax 2011 free edition Other liabilities (debts) not included above $ 15. Turbotax 2011 free edition Total liabilities immediately before the cancellation. Turbotax 2011 free edition Add lines 1 through 14. Turbotax 2011 free edition $ 320,500 Part II. Turbotax 2011 free edition Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Turbotax 2011 free edition Cash and bank account balances $ 6,000 17. Turbotax 2011 free edition Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Turbotax 2011 free edition Cars and other vehicles $ 19. Turbotax 2011 free edition Computers $ 20. Turbotax 2011 free edition Household goods and furnishings (for example, appliances, electronics, furniture, etc. Turbotax 2011 free edition ) $ 21. Turbotax 2011 free edition Tools $ 22. Turbotax 2011 free edition Jewelry $ 23. Turbotax 2011 free edition Clothing $ 24. Turbotax 2011 free edition Books $ 25. Turbotax 2011 free edition Stocks and bonds $ 26. Turbotax 2011 free edition Investments in coins, stamps, paintings, or other collectibles $ 27. Turbotax 2011 free edition Firearms, sports, photographic, and other hobby equipment $ 28. Turbotax 2011 free edition Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Turbotax 2011 free edition Interest in a pension plan $ 30. Turbotax 2011 free edition Interest in education accounts $ 31. Turbotax 2011 free edition Cash value of life insurance $ 32. Turbotax 2011 free edition Security deposits with landlords, utilities, and others $ 33. Turbotax 2011 free edition Interests in partnerships $ 34. Turbotax 2011 free edition Value of investment in a business $ 35. Turbotax 2011 free edition Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Turbotax 2011 free edition Other assets not included above $ 37. Turbotax 2011 free edition FMV of total assets immediately before the cancellation. Turbotax 2011 free edition Add lines 16 through 36. Turbotax 2011 free edition $ 309,000 Part III. Turbotax 2011 free edition Insolvency 38. Turbotax 2011 free edition Amount of Insolvency. Turbotax 2011 free edition Subtract line 37 from line 15. Turbotax 2011 free edition If zero or less, you are not insolvent. Turbotax 2011 free edition $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Turbotax 2011 free edition Please click the link to view the image. Turbotax 2011 free edition Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Turbotax 2011 free edition    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Turbotax 2011 free edition Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Turbotax 2011 free edition Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Turbotax 2011 free edition   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Turbotax 2011 free edition The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Turbotax 2011 free edition On December 26, 2013, the lender canceled the remaining debt. Turbotax 2011 free edition Kathy and Frank have no tax attributes other than basis of personal-use property. Turbotax 2011 free edition   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Turbotax 2011 free edition Identifiable event code "D" appears in box 6. Turbotax 2011 free edition This box shows the reason the creditor has filed Form 1099-C. Turbotax 2011 free edition Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Turbotax 2011 free edition Kathy and Frank are filing a joint return for 2013. Turbotax 2011 free edition   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Turbotax 2011 free edition Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Turbotax 2011 free edition Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Turbotax 2011 free edition Because this loss relates to their home, it is a nondeductible loss. Turbotax 2011 free edition   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Turbotax 2011 free edition Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Turbotax 2011 free edition Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Turbotax 2011 free edition The household furnishings originally cost $30,000. Turbotax 2011 free edition The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Turbotax 2011 free edition Kathy and Frank had no adjustments to the cost basis of the car. Turbotax 2011 free edition Kathy and Frank had no other assets or liabilities at the time of the cancellation. Turbotax 2011 free edition Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Turbotax 2011 free edition   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Turbotax 2011 free edition Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Turbotax 2011 free edition Kathy and Frank had no other assets or liabilities at that time. Turbotax 2011 free edition Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Turbotax 2011 free edition   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Turbotax 2011 free edition The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Turbotax 2011 free edition The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Turbotax 2011 free edition Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Turbotax 2011 free edition Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Turbotax 2011 free edition This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Turbotax 2011 free edition   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Turbotax 2011 free edition Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Turbotax 2011 free edition Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Turbotax 2011 free edition Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Turbotax 2011 free edition   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Turbotax 2011 free edition Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Turbotax 2011 free edition Thus, Kathy and Frank leave line 10b of Form 982 blank. Turbotax 2011 free edition However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Turbotax 2011 free edition As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Turbotax 2011 free edition Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Turbotax 2011 free edition Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Turbotax 2011 free edition Kathy and Frank reduce the basis in the car by $14,956. Turbotax 2011 free edition 52 ($43,000 x $16,000/$46,000). Turbotax 2011 free edition And they reduce the basis in the household furnishings by $28,043. Turbotax 2011 free edition 48 ($43,000 x $30,000/$46,000). Turbotax 2011 free edition   Following are Kathy and Frank's sample forms and worksheets. Turbotax 2011 free edition Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Turbotax 2011 free edition Please click the link to view the image. Turbotax 2011 free edition Form 1099-C, Cancellation of Debt Table 1-1. Turbotax 2011 free edition Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Turbotax 2011 free edition Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Turbotax 2011 free edition Otherwise, go to Part 2. Turbotax 2011 free edition 1. Turbotax 2011 free edition Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Turbotax 2011 free edition 00 2. Turbotax 2011 free edition Enter the fair market value of the transferred property $1,750,000. Turbotax 2011 free edition 00 3. Turbotax 2011 free edition Ordinary income from the cancellation of debt upon foreclosure or repossession. Turbotax 2011 free edition * Subtract line 2 from line 1. Turbotax 2011 free edition If less than zero, enter zero. Turbotax 2011 free edition Next, go to Part 2 $0. Turbotax 2011 free edition 00 Part 2. Turbotax 2011 free edition Gain or loss from foreclosure or repossession. Turbotax 2011 free edition   4. Turbotax 2011 free edition Enter the smaller of line 1 or line 2. Turbotax 2011 free edition If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Turbotax 2011 free edition $1,750,000. Turbotax 2011 free edition 00 5. Turbotax 2011 free edition Enter any proceeds you received from the foreclosure sale   6. Turbotax 2011 free edition Add line 4 and line 5 $1,750,000. Turbotax 2011 free edition 00 7. Turbotax 2011 free edition Enter the adjusted basis of the transferred property $3,000,000. Turbotax 2011 free edition 00 8. Turbotax 2011 free edition Gain or loss from foreclosure or repossession. Turbotax 2011 free edition Subtract line 7 from line 6 ($1,250,000. Turbotax 2011 free edition 00) * The income may not be taxable. Turbotax 2011 free edition See chapter 1 for more details. Turbotax 2011 free edition    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Turbotax 2011 free edition Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Turbotax 2011 free edition Credit card debt $ 18,000 2. Turbotax 2011 free edition Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Turbotax 2011 free edition Car and other vehicle loans $ 4. Turbotax 2011 free edition Medical bills owed $ 5. Turbotax 2011 free edition Student loans $ 6. Turbotax 2011 free edition Accrued or past-due mortgage interest $ 7. Turbotax 2011 free edition Accrued or past-due real estate taxes $ 8. Turbotax 2011 free edition Accrued or past-due utilities (water, gas, electric) $ 9. Turbotax 2011 free edition Accrued or past-due child care costs $ 10. Turbotax 2011 free edition Federal or state income taxes remaining due (for prior tax years) $ 11. Turbotax 2011 free edition Judgments $ 12. Turbotax 2011 free edition Business debts (including those owed as a sole proprietor or partner) $ 13. Turbotax 2011 free edition Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Turbotax 2011 free edition Other liabilities (debts) not included above $ 15. Turbotax 2011 free edition Total liabilities immediately before the cancellation. Turbotax 2011 free edition Add lines 1 through 14. Turbotax 2011 free edition $ 768,000 Part II. Turbotax 2011 free edition Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Turbotax 2011 free edition Cash and bank account balances $ 15,000 17. Turbotax 2011 free edition Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Turbotax 2011 free edition Cars and other vehicles $ 10,000 19. Turbotax 2011 free edition Computers $ 20. Turbotax 2011 free edition Household goods and furnishings (for example, appliances, electronics, furniture, etc. Turbotax 2011 free edition ) $ 17,000 21. Turbotax 2011 free edition Tools $ 22. Turbotax 2011 free edition Jewelry $ 23. Turbotax 2011 free edition Clothing $ 24. Turbotax 2011 free edition Books $ 25. Turbotax 2011 free edition Stocks and bonds $ 26. Turbotax 2011 free edition Investments in coins, stamps, paintings, or other collectibles $ 27. Turbotax 2011 free edition Firearms, sports, photographic, and other hobby equipment $ 28. Turbotax 2011 free edition Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Turbotax 2011 free edition Interest in a pension plan $ 30. Turbotax 2011 free edition Interest in education accounts $ 31. Turbotax 2011 free edition Cash value of life insurance $ 32. Turbotax 2011 free edition Security deposits with landlords, utilities, and others $ 33. Turbotax 2011 free edition Interests in partnerships $ 34. Turbotax 2011 free edition Value of investment in a business $ 35. Turbotax 2011 free edition Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Turbotax 2011 free edition Other assets not included above $ 37. Turbotax 2011 free edition FMV of total assets immediately before the cancellation. Turbotax 2011 free edition Add lines 16 through 36. Turbotax 2011 free edition $ 42,000 Part III. Turbotax 2011 free edition Insolvency 38. Turbotax 2011 free edition Amount of Insolvency. Turbotax 2011 free edition Subtract line 37 from line 15. Turbotax 2011 free edition If zero or less, you are not insolvent. Turbotax 2011 free edition $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Turbotax 2011 free edition Please click the link to view the image. Turbotax 2011 free edition Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications
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The Turbotax 2011 Free Edition

Turbotax 2011 free edition 2. Turbotax 2011 free edition   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. Turbotax 2011 free edition You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Turbotax 2011 free edition 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. Turbotax 2011 free edition You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Turbotax 2011 free edition You can deduct depreciation only on the part of your property used for rental purposes. Turbotax 2011 free edition Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Turbotax 2011 free edition You may have to use Form 4562 to figure and report your depreciation. Turbotax 2011 free edition See Which Forms To Use in chapter 3. Turbotax 2011 free edition Also see Publication 946. Turbotax 2011 free edition Section 179 deduction. Turbotax 2011 free edition   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. Turbotax 2011 free edition This deduction is not allowed for property used in connection with residential rental property. Turbotax 2011 free edition See chapter 2 of Publication 946. Turbotax 2011 free edition Alternative minimum tax (AMT). Turbotax 2011 free edition   If you use accelerated depreciation, you may be subject to the AMT. Turbotax 2011 free edition 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). Turbotax 2011 free edition   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Turbotax 2011 free edition However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Turbotax 2011 free edition   To find out if you are subject to the AMT, see the Instructions for Form 6251. Turbotax 2011 free edition 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. Turbotax 2011 free edition What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Turbotax 2011 free edition You own the property. Turbotax 2011 free edition You use the property in your business or income-producing activity (such as rental property). Turbotax 2011 free edition The property has a determinable useful life. Turbotax 2011 free edition The property is expected to last more than one year. Turbotax 2011 free edition Property you own. Turbotax 2011 free edition   To claim depreciation, you usually must be the owner of the property. Turbotax 2011 free edition You are considered as owning property even if it is subject to a debt. Turbotax 2011 free edition Rented property. Turbotax 2011 free edition   Generally, if you pay rent for property, you cannot depreciate that property. Turbotax 2011 free edition Usually, only the owner can depreciate it. Turbotax 2011 free edition However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Turbotax 2011 free edition See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Turbotax 2011 free edition Cooperative apartments. Turbotax 2011 free edition   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. Turbotax 2011 free edition See chapter 4, Special Situations. Turbotax 2011 free edition Property having a determinable useful life. Turbotax 2011 free edition   To be depreciable, your property must have a determinable useful life. Turbotax 2011 free edition This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Turbotax 2011 free edition What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Turbotax 2011 free edition This includes land and certain excepted property. Turbotax 2011 free edition Land. Turbotax 2011 free edition   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Turbotax 2011 free edition But if it does, the loss is accounted for upon disposition. Turbotax 2011 free edition The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Turbotax 2011 free edition   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Turbotax 2011 free edition 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. Turbotax 2011 free edition Example. Turbotax 2011 free edition You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Turbotax 2011 free edition Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Turbotax 2011 free edition If you replace the house, you would have to destroy the bushes and trees right next to it. Turbotax 2011 free edition These bushes and trees are closely associated with the house, so they have a determinable useful life. Turbotax 2011 free edition Therefore, you can depreciate them. Turbotax 2011 free edition Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Turbotax 2011 free edition Excepted property. Turbotax 2011 free edition   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Turbotax 2011 free edition Property placed in service and disposed of (or taken out of business use) in the same year. Turbotax 2011 free edition Equipment used to build capital improvements. Turbotax 2011 free edition You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Turbotax 2011 free edition For more information, see chapter 1 of Publication 946. Turbotax 2011 free edition When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition Even if you are not using the property, it is in service when it is ready and available for its specific use. Turbotax 2011 free edition Example 1. Turbotax 2011 free edition On November 22 of last year, you purchased a dishwasher for your rental property. Turbotax 2011 free edition The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Turbotax 2011 free edition Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Turbotax 2011 free edition 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. Turbotax 2011 free edition Example 2. Turbotax 2011 free edition On April 6, you purchased a house to use as residential rental property. Turbotax 2011 free edition You made extensive repairs to the house and had it ready for rent on July 5. Turbotax 2011 free edition You began to advertise the house for rent in July and actually rented it beginning September 1. Turbotax 2011 free edition The house is considered placed in service in July when it was ready and available for rent. Turbotax 2011 free edition You can begin to depreciate the house in July. Turbotax 2011 free edition Example 3. Turbotax 2011 free edition You moved from your home in July. Turbotax 2011 free edition During August and September you made several repairs to the house. Turbotax 2011 free edition On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Turbotax 2011 free edition The property is considered placed in service on October 1, the date when it was available for rent. Turbotax 2011 free edition Conversion to business use. Turbotax 2011 free edition   If you place property in service in a personal activity, you cannot claim depreciation. Turbotax 2011 free edition 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. Turbotax 2011 free edition You place the property in service for business or income-producing use on the date of the change. Turbotax 2011 free edition Example. Turbotax 2011 free edition You bought a house and used it as your personal home several years before you converted it to rental property. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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). Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Turbotax 2011 free edition See Basis of Depreciable Property , later. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition You sell or exchange the property. Turbotax 2011 free edition You convert the property to personal use. Turbotax 2011 free edition You abandon the property. Turbotax 2011 free edition The property is destroyed. Turbotax 2011 free edition Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Turbotax 2011 free edition If you placed rental property in service before 1987, you are using one of the following methods. Turbotax 2011 free edition ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Turbotax 2011 free edition Straight line or declining balance method over the useful life of property placed in service before 1981. Turbotax 2011 free edition See MACRS Depreciation , later, for more information. Turbotax 2011 free edition Rental property placed in service before 2013. Turbotax 2011 free edition   Continue to use the same method of figuring depreciation that you used in the past. Turbotax 2011 free edition Use of real property changed. Turbotax 2011 free edition   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. Turbotax 2011 free edition This includes your residence that you changed to rental use. Turbotax 2011 free edition See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Turbotax 2011 free edition Improvements made after 1986. Turbotax 2011 free edition   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Turbotax 2011 free edition 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. Turbotax 2011 free edition For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Turbotax 2011 free edition This publication discusses MACRS depreciation only. Turbotax 2011 free edition If you need information about depreciating property placed in service before 1987, see Publication 534. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition Basis and adjusted basis are explained in the following discussions. Turbotax 2011 free edition 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. Turbotax 2011 free edition See Basis of Property Changed to Rental Use in chapter 4. Turbotax 2011 free edition Cost Basis The basis of property you buy is usually its cost. Turbotax 2011 free edition The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Turbotax 2011 free edition 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. Turbotax 2011 free edition Exception. Turbotax 2011 free edition   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. Turbotax 2011 free edition Such taxes were deductible before 1987 and after 2003. Turbotax 2011 free edition Loans with low or no interest. Turbotax 2011 free edition   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. Turbotax 2011 free edition See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Turbotax 2011 free edition Real property. Turbotax 2011 free edition   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. Turbotax 2011 free edition Real estate taxes. Turbotax 2011 free edition   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. Turbotax 2011 free edition You cannot deduct them as taxes paid. Turbotax 2011 free edition   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Turbotax 2011 free edition Do not include that amount in your basis in the property. Turbotax 2011 free edition Settlement fees and other costs. Turbotax 2011 free edition   The following settlement fees and closing costs for buying the property are part of your basis in the property. Turbotax 2011 free edition Abstract fees. Turbotax 2011 free edition Charges for installing utility services. Turbotax 2011 free edition Legal fees. Turbotax 2011 free edition Recording fees. Turbotax 2011 free edition Surveys. Turbotax 2011 free edition Transfer taxes. Turbotax 2011 free edition Title insurance. Turbotax 2011 free edition 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. Turbotax 2011 free edition   The following are settlement fees and closing costs you cannot include in your basis in the property. Turbotax 2011 free edition Fire insurance premiums. Turbotax 2011 free edition Rent or other charges relating to occupancy of the property before closing. Turbotax 2011 free edition 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. Turbotax 2011 free edition   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Turbotax 2011 free edition Assumption of a mortgage. Turbotax 2011 free edition   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. Turbotax 2011 free edition Example. Turbotax 2011 free edition You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Turbotax 2011 free edition Your basis is $300,000. Turbotax 2011 free edition Separating cost of land and buildings. Turbotax 2011 free edition   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. Turbotax 2011 free edition 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. Turbotax 2011 free edition   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. Turbotax 2011 free edition Example. Turbotax 2011 free edition You buy a house and land for $200,000. Turbotax 2011 free edition The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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). Turbotax 2011 free edition 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. Turbotax 2011 free edition If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Turbotax 2011 free edition 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. Turbotax 2011 free edition The result of these adjustments to the basis is the adjusted basis. Turbotax 2011 free edition Increases to basis. Turbotax 2011 free edition   You must increase the basis of any property by the cost of all items properly added to a capital account. Turbotax 2011 free edition These include the following. Turbotax 2011 free edition 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. Turbotax 2011 free edition Amounts spent after a casualty to restore the damaged property. Turbotax 2011 free edition The cost of extending utility service lines to the property. Turbotax 2011 free edition Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Turbotax 2011 free edition Additions or improvements. Turbotax 2011 free edition   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. Turbotax 2011 free edition This includes all direct costs, such as material and labor, but does not include your own labor. Turbotax 2011 free edition It also includes all expenses related to the addition or improvement. Turbotax 2011 free edition   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. Turbotax 2011 free edition 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. Turbotax 2011 free edition   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Turbotax 2011 free edition For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Turbotax 2011 free edition    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Turbotax 2011 free edition However, see What Rental Property Cannot Be Depreciated, earlier. Turbotax 2011 free edition Assessments for local improvements. Turbotax 2011 free edition   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. Turbotax 2011 free edition 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. Turbotax 2011 free edition Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Turbotax 2011 free edition You cannot deduct these items as taxes or depreciate them. Turbotax 2011 free edition    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Turbotax 2011 free edition Do not add them to your basis in the property. Turbotax 2011 free edition Deducting vs. Turbotax 2011 free edition capitalizing costs. Turbotax 2011 free edition   Do not add to your basis costs you can deduct as current expenses. Turbotax 2011 free edition However, there are certain costs you can choose either to deduct or to capitalize. Turbotax 2011 free edition If you capitalize these costs, include them in your basis. Turbotax 2011 free edition If you deduct them, do not include them in your basis. Turbotax 2011 free edition   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Turbotax 2011 free edition   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Turbotax 2011 free edition Decreases to basis. Turbotax 2011 free edition   You must decrease the basis of your property by any items that represent a return of your cost. Turbotax 2011 free edition These include the following. Turbotax 2011 free edition Insurance or other payment you receive as the result of a casualty or theft loss. Turbotax 2011 free edition Casualty loss not covered by insurance for which you took a deduction. Turbotax 2011 free edition Amount(s) you receive for granting an easement. Turbotax 2011 free edition 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. Turbotax 2011 free edition Exclusion from income of subsidies for energy conservation measures. Turbotax 2011 free edition Special depreciation allowance claimed on qualified property. Turbotax 2011 free edition Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Turbotax 2011 free edition If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Turbotax 2011 free edition   If your rental property was previously used as your main home, you must also decrease the basis by the following. Turbotax 2011 free edition Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Turbotax 2011 free edition District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Turbotax 2011 free edition Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Turbotax 2011 free edition Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Turbotax 2011 free edition This allowance is figured before you figure your regular depreciation deduction. Turbotax 2011 free edition See Publication 946, chapter 3, for details. Turbotax 2011 free edition Also see the Instructions for Form 4562, Line 14. Turbotax 2011 free edition If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Turbotax 2011 free edition The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Turbotax 2011 free edition MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Turbotax 2011 free edition This section explains how to determine which MACRS depreciation system applies to your property. Turbotax 2011 free edition It also discusses other information you need to know before you can figure depreciation under MACRS. Turbotax 2011 free edition This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Turbotax 2011 free edition 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). Turbotax 2011 free edition You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Turbotax 2011 free edition Electing ADS If you choose, you can use the ADS method for most property. Turbotax 2011 free edition Under ADS, you use the straight line method of depreciation. Turbotax 2011 free edition 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. Turbotax 2011 free edition However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Turbotax 2011 free edition 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. Turbotax 2011 free edition Once you make this election, you can never revoke it. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition The property class generally determines the depreciation method, recovery period, and convention. Turbotax 2011 free edition 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. Turbotax 2011 free edition Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Turbotax 2011 free edition 5-year property. Turbotax 2011 free edition This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Turbotax 2011 free edition ), automobiles, and light trucks. Turbotax 2011 free edition This class also includes appliances, carpeting, furniture, etc. Turbotax 2011 free edition , used in a residential rental real estate activity. Turbotax 2011 free edition 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. Turbotax 2011 free edition See chapter 5 of Publication 946. Turbotax 2011 free edition 7-year property. Turbotax 2011 free edition This class includes office furniture and equipment (desks, file cabinets, etc. Turbotax 2011 free edition ). Turbotax 2011 free edition 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. Turbotax 2011 free edition 15-year property. Turbotax 2011 free edition This class includes roads, fences, and shrubbery (if depreciable). Turbotax 2011 free edition Residential rental property. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition The other property classes do not generally apply to property used in rental activities. Turbotax 2011 free edition These classes are not discussed in this publication. Turbotax 2011 free edition See Publication 946 for more information. Turbotax 2011 free edition Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Turbotax 2011 free edition The recovery periods are generally longer under ADS than GDS. Turbotax 2011 free edition The recovery period of property depends on its property class. Turbotax 2011 free edition Under GDS, the recovery period of an asset is generally the same as its property class. Turbotax 2011 free edition Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Turbotax 2011 free edition See Table 2-1 for recovery periods of property commonly used in residential rental activities. Turbotax 2011 free edition Qualified Indian reservation property. Turbotax 2011 free edition   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Turbotax 2011 free edition For more information, see chapter 4 of Publication 946. Turbotax 2011 free edition Additions or improvements to property. Turbotax 2011 free edition   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Turbotax 2011 free edition   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. Turbotax 2011 free edition   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. Turbotax 2011 free edition Example. Turbotax 2011 free edition You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Turbotax 2011 free edition You built an addition onto the house and placed it in service in 2013. Turbotax 2011 free edition You must use MACRS for the addition. Turbotax 2011 free edition Under GDS, the addition is depreciated as residential rental property over 27. Turbotax 2011 free edition 5 years. Turbotax 2011 free edition Table 2-1. Turbotax 2011 free edition 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. Turbotax 2011 free edition 27. Turbotax 2011 free edition 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. Turbotax 2011 free edition   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Turbotax 2011 free edition 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. Turbotax 2011 free edition Mid-month convention. Turbotax 2011 free edition    A mid-month convention is used for all residential rental property and nonresidential real property. Turbotax 2011 free edition 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. Turbotax 2011 free edition Mid-quarter convention. Turbotax 2011 free edition   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. Turbotax 2011 free edition   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. Turbotax 2011 free edition Example. Turbotax 2011 free edition During the tax year, Tom Martin purchased the following items to use in his rental property. Turbotax 2011 free edition He elects not to claim the special depreciation allowance discussed earlier. Turbotax 2011 free edition A dishwasher for $400 that he placed in service in January. Turbotax 2011 free edition Used furniture for $100 that he placed in service in September. Turbotax 2011 free edition A refrigerator for $800 that he placed in service in October. Turbotax 2011 free edition Tom uses the calendar year as his tax year. Turbotax 2011 free edition The total basis of all property placed in service that year is $1,300. Turbotax 2011 free edition The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Turbotax 2011 free edition Tom must use the mid-quarter convention instead of the half-year convention for all three items. Turbotax 2011 free edition Half-year convention. Turbotax 2011 free edition    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Turbotax 2011 free edition 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. Turbotax 2011 free edition   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. Turbotax 2011 free edition You deduct a full year of depreciation for any other year during the recovery period. Turbotax 2011 free edition Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Turbotax 2011 free edition The deduction is substantially the same both ways. Turbotax 2011 free edition 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. Turbotax 2011 free edition In this publication we will use the percentage tables. Turbotax 2011 free edition For instructions on how to compute the deduction, see chapter 4 of Publication 946. Turbotax 2011 free edition Residential rental property. Turbotax 2011 free edition   You must use the straight line method and a mid-month convention for residential rental property. Turbotax 2011 free edition 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). Turbotax 2011 free edition 5-, 7-, or 15-year property. Turbotax 2011 free edition   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Turbotax 2011 free edition However, in limited cases you must use the mid-quarter convention, if it applies. Turbotax 2011 free edition For property in the 15-year class, use the 150% declining balance method and a half-year convention. Turbotax 2011 free edition   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Turbotax 2011 free edition 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. Turbotax 2011 free edition You make this election on Form 4562. Turbotax 2011 free edition In Part III, column (f), enter “150 DB. Turbotax 2011 free edition ” Once you make this election, you cannot change to another method. Turbotax 2011 free edition   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. Turbotax 2011 free edition   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. Turbotax 2011 free edition 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. Turbotax 2011 free edition You elect the straight line method on Form 4562. Turbotax 2011 free edition In Part III, column (f), enter “S/L. Turbotax 2011 free edition ” Once you make this election, you cannot change to another method. Turbotax 2011 free edition MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Turbotax 2011 free edition The tables show the percentages for the first few years or until the change to the straight line method is made. Turbotax 2011 free edition See Appendix A of Publication 946 for complete tables. Turbotax 2011 free edition 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. Turbotax 2011 free edition 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. Turbotax 2011 free edition How to use the percentage tables. Turbotax 2011 free edition   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Turbotax 2011 free edition   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. Turbotax 2011 free edition   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. Turbotax 2011 free edition 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 . Turbotax 2011 free edition See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Turbotax 2011 free edition Unadjusted basis. Turbotax 2011 free edition   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. Turbotax 2011 free edition   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. Turbotax 2011 free edition For more information, see chapter 4 of Publication 946. Turbotax 2011 free edition Please click here for the text description of the image. Turbotax 2011 free edition Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Turbotax 2011 free edition   The percentages in these tables take into account the half-year and mid-quarter conventions. Turbotax 2011 free edition Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Turbotax 2011 free edition Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Turbotax 2011 free edition 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. Turbotax 2011 free edition Example 1. Turbotax 2011 free edition You purchased a stove and refrigerator and placed them in service in June. Turbotax 2011 free edition Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Turbotax 2011 free edition Both are 5-year property. Turbotax 2011 free edition Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Turbotax 2011 free edition For that year your depreciation deduction is $120 ($600 × . Turbotax 2011 free edition 20) for the stove and $200 ($1,000 × . Turbotax 2011 free edition 20) for the refrigerator. Turbotax 2011 free edition For Year 2, the depreciation percentage is 32%. Turbotax 2011 free edition That year's depreciation deduction will be $192 ($600 × . Turbotax 2011 free edition 32) for the stove and $320 ($1,000 × . Turbotax 2011 free edition 32) for the refrigerator. Turbotax 2011 free edition Example 2. Turbotax 2011 free edition Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Turbotax 2011 free edition 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 × . Turbotax 2011 free edition 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Turbotax 2011 free edition 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%. Turbotax 2011 free edition Your depreciation deduction for the refrigerator is $50 ($1,000 x . Turbotax 2011 free edition 05). Turbotax 2011 free edition 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%. Turbotax 2011 free edition For that year, your depreciation deduction for the stove is $150 ($600 x . Turbotax 2011 free edition 25). Turbotax 2011 free edition Table 2-2d. Turbotax 2011 free edition    Use this table when you are using the GDS 27. Turbotax 2011 free edition 5 year option for residential rental property. Turbotax 2011 free edition Find the row for the month that you placed the property in service. Turbotax 2011 free edition Use the percentages listed for that month to figure your depreciation deduction. Turbotax 2011 free edition The mid-month convention is taken into account in the percentages shown in the table. Turbotax 2011 free edition Continue to use the same row (month) under the column for the appropriate year. Turbotax 2011 free edition Example. Turbotax 2011 free edition You purchased a single family rental house for $185,000 and placed it in service on February 8. Turbotax 2011 free edition The sales contract showed that the building cost $160,000 and the land cost $25,000. Turbotax 2011 free edition Your basis for depreciation is its original cost, $160,000. Turbotax 2011 free edition 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. Turbotax 2011 free edition 5 years. Turbotax 2011 free edition Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Turbotax 2011 free edition 182%. Turbotax 2011 free edition That year's depreciation deduction is $5,091 ($160,000 x . Turbotax 2011 free edition 03182). Turbotax 2011 free edition Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Turbotax 2011 free edition See Appendix B in Publication 946 for other property. Turbotax 2011 free edition If your property is not listed in Appendix B, it is considered to have no class life. Turbotax 2011 free edition Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Turbotax 2011 free edition Use the mid-month convention for residential rental property and nonresidential real property. Turbotax 2011 free edition For all other property, use the half-year or mid-quarter convention, as appropriate. Turbotax 2011 free edition See Publication 946 for ADS depreciation tables. Turbotax 2011 free edition Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Turbotax 2011 free edition 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. Turbotax 2011 free edition For more information, see Depreciation under Decreases to Basis in Publication 551. Turbotax 2011 free edition 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. Turbotax 2011 free edition S. Turbotax 2011 free edition Individual Income Tax Return. Turbotax 2011 free edition 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. Turbotax 2011 free edition Filing an amended return. Turbotax 2011 free edition   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Turbotax 2011 free edition You claimed the incorrect amount because of a mathematical error made in any year. Turbotax 2011 free edition You claimed the incorrect amount because of a posting error made in any year. Turbotax 2011 free edition You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Turbotax 2011 free edition You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Turbotax 2011 free edition   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. Turbotax 2011 free edition 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. Turbotax 2011 free edition   If an amended return is allowed, you must file it by the later of the following dates. Turbotax 2011 free edition 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Turbotax 2011 free edition A return filed before an unextended due date is considered filed on that due date. Turbotax 2011 free edition 2 years from the time you paid your tax for that year. Turbotax 2011 free edition Changing your accounting method. Turbotax 2011 free edition   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Turbotax 2011 free edition In some instances, that consent is automatic. Turbotax 2011 free edition For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Turbotax 2011 free edition Prev  Up  Next   Home   More Online Publications