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Frequently Asked Tax Questions And Answers
Keyword: Depreciation Deduction
10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)
I lived in a home as my principal residence for the first 2 of the last
5 years. For the last 3 years, the home was a rental property before selling it. Can
I still avoid the capital gains tax and, if so, how should I deal with the depreciation
I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for
at least 2 years and lived in it as your main home for at least 2 years, you can exclude
up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you
cannot exclude the portion of the gain equal to depreciation allowed or allowable
for periods after May 6, 1997. This gain is reported on Form 4797. If you can show
by adequate records or other evidence that the depreciation allowed was less than
the amount allowable, the amount you cannot exclude is the amount allowed. Refer toPublication 523 , Selling Your Main Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and
reporting the amount of the eligible exclusion.
References:
11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture
Can the entire acquisition cost of a computer that I purchased for
my business be deducted as a business expense or do I have to use depreciation?
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the
aggregate cost that can be expensed for any tax year after 2002 and before
2006 to $100,000. The new law also expanded the definition of Code Section
179 property to include off-the shelf computer software. See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired in service after
September 10, 2001 and before January 1, 2005. The allowance is a depreciation
deduction equal to 30% of the property's depreciable basis. The special depreciation
is figured before you calculate your regular depreciation. To qualify for
the special deduction the property must:
Be new property this is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service and before January 1, 2005.
Be property the original use of which began after September 10, 2001
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 modified
the bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
the 50% depreciation property instead of the 50% additional firs-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
What kinds of property can be depreciated for tax purposes?
Only property used in a trade or business or in an income production activity
can be depreciated. Additionally, the property must be something that wears
out or becomes obsolete and it must have a determinable useful life substantially
beyond the tax year. The kinds of property that can be depreciated include,
but are not limited to, machinery, equipment, buildings, vehicles, and furniture.
Depreciation is a complex topic. For more information, refer to Tax Topic 704, Depreciation,
or Publication 946, How to Depreciate Property ,
or Publication 534 (PDF) , Depreciating Property
Placed in Service Before 1987.
References:
I purchased a computer last year to do online day trading part-time
from home for additional income. Can I deduct or depreciate the cost of the
computer or internet connection from my investment income?
You may deduct investment expenses (other than interest expenses) as miscellaneous
itemized deductions on Form 1040, Schedule A (PDF),
line 22, Itemized Deductions. This would include depreciation on
the portion of your computer used for investment purposes, and the portion
of your internet access charges used for investment purposes.
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year beginning after 2002 and before 2006 to $100,000. The new
law also expanded the definition of Code Section 179 property to include off-the-shelf
computer software. See Code Section 179 for the expanded definition. If the business use falls
to 50% or less in a later year, these tax benefits may be subject to recapture.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
These deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization,
to compute the depreciation for the portion of your computer used for investment
purposes.
Note: Unless the computer is used more than 50% for business purpose (as
opposed to investment purposes), you cannot claim section 179 expensing of
the computer or claim accelerated depreciation for it. For more information,
refer to "Listed Property" in Publication 946, How to Depreciate Property.
References:
I purchased a computer to support my job-related activities. As
an employee, can I write-off the entire allowed cost or will I have to depreciate
it over a few years?
You can claim a depreciation deduction for a computer that you use in your
work as an employee if its use is:
For the convenience of your employer, and
Required as a condition of your employment.
Use Form 4562 (PDF) , Depreciation and
Amortization , to compute the depreciation. There have been recent changes
to the percentage of depreciation claimed in the first year you place the
property in service.
The cost of a computer purchased for business use can be expensed under
section 179 in the first year if qualified, or depreciated over the recovery
period. To claim the expense in the first year, the property must be used
more than 50% for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year after 2002 and before 2006 to $100,000. The new law also
expanded the definition of Code Section 179 property to include off-the shelf computer software.
See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired after September
10, 2001 and before January 1, 2005. The allowance is figured before you calculate
your regular depreciation. See Publication 946 , How to
Depreciate Property for additional information on the special deduction.
You cannot take a section 179 deduction for the item or claim accelerated
depreciation unless your use of the computer is more than 50% business or
job-related use (and you meet the two conditions listed above).
Section 179 deductions and accelerated depreciation methods are explained
in Publication 946, How to Depreciate Property.
References:
I need to know the maximum deduction allowed for depreciation on
a passenger automobile purchased in 2003?
The maximum deduction (including any amounts deducted under section 179)
that can be claimed for a used passenger automobile or one that is Liberty
Zone property that was placed in service in 2003 is $3,060 for the first year,
$4,900 for the second year, $2,950 for the third year, and $1,775 for the
fourth and following years. For a new passenger automobile acquired on or
before May 5, 2003 (and not Liberty Zone property), the first year deduction
is limited to $7,660 (or $3,060 if the owner elects not to take the 30 percent
additional bonus depreciation allowance. The 2003 Jobs and Growth Tax Relief
and Reconciliation Act provided that for qualified vehicles purchased after
May 5, 2003, the first-year depreciation deduction is limited to $10,710 (or
$3,060 if the owner elects not to take either the 30% or the 50% bonus depreciation
allowance). Subsequent year limits are the same as for used vehicles. Some
what higher limits apply to owners of trucks and vans. For more information
refer to Publication 946, How to Depreciate Property and Publication 463, Travel, Entertainment, Gift, and Car Expenses
References:
I have a home office. Can I deduct expenses like mortgage, utilities,
etc., but not deduct depreciation so that when I sell this house, the basis
won't be affected?
If you have qualified business use of your home and enough gross income
from that business use to that entitle you to a depreciation deduction, you
are required to reduce your basis in the home by the amount of depreciation
allowed (deducted) or allowable (could have been deducted).
Whether you choose to deduct the depreciation on your current return(s)
will not matter. For tax purposes, you will still be treated as if you had
taken the allowable deduction, and your basis will have to be reduced. For
more information, refer to Publication 946, How to Depreciate Property, Publication 544, Sales and Other Dispositions of Assets, and Publication 587, Business Use of Your Home.
References:
I have a rental property. Do I have to take depreciation on it?
You do not have to claim depreciation on your rental property on your tax
return. However, when reporting the sale of the rental property you are required
to reduce the basis of the property for allowable depreciation regardless
of whether the depreciation deduction was taken or not. For more information,
refer to Publication 544, Sale or Other Dispositions of Assets,
the
Instructions for Form 4797, Sale of Business Property,
and Publication 527, Residential Rental Property (including
vacation homes).
References:
In calculating depreciation on both my rental apartment building
and its furniture, what depreciation type, asset class, depreciation method,
and recovery period should be used?
You can claim a special depreciation allowance for qualified property you
acquired after September 10, 2001 and before January 1, 2005. The allowance
is a depreciation deduction equal to 30% of the property's depreciable basis.
The special depreciation is figured before you calculate your regular depreciation.
To qualify for the special deduction the property must:
Be new property that is depreciated under MACRS with recovery period of
20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service Before January 1, 2005.
Be property that the original use began after September 10, 2001.
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 modified the
bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
50% depreciation property instead of the 50% additional first year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation deduction.
References:
We replaced the roof on a residential rental property and need to
know what to use for the classification and recovery period to calculate depreciation?
Replacement of a roof on a residential rental property is a capital improvement
to the structure. The roof is in the same class of property as the property
to which it is attached. Since the property is residential rental property,
the roof is generally depreciated over a residential rental property recovery
period of 27.5 years using the straight line method of depreciation and a
mid-month convention. You cannot write off (or take a loss on) any remaining
basis in the replaced roof. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
On residential rental property, would new windows and siding be
considered a repair that could be deducted against income, or would they be
capitalized as an improvement?
Replacement of windows and siding on a residential rental property is a
capital improvement to the structure, provided the replacement improves the
value of this property or substantiality prolongs its life. The windows and
siding, in that event, are in the same class of property as the property to
which they are affixed. In this case, the windows and siding are generally
depreciated over a recovery period of 27.5 years using the straight line method
of depreciation and a mid-month convention. For more information, refer to Publication 527, Residential Rental Property, and Publication 946, How
to Depreciate Property.
References:
We have incurred substantial repairs to our rental property: new
roof, gutters, windows, furnace, and outside paint. What are the IRS rules
concerning depreciation?
Replacements of roof, rain gutters, windows, and furnace on a residential
rental property are capital improvements to the structure because they materially
add to the value of your property or substantially prolong its life. The items
would be in the same class of property as the rental property to which to
which they are attached. Since the property is residential rental property,
the items are generally depreciated over 27.5 years using the straight line
method of depreciation and a mid-month convention.
Repairs, such as repainting the house, are currently deductible expenses.
A repair keeps your property in good operating condition. It does not materially
add to the value of your property or substantially prolong its life. Repainting
your property inside or out, fixing gutters or floors, fixing leaks, plastering,
and replacing broken windows are examples of repairs. If you make repairs
as part of an extensive remodeling or restoration of your property, the whole
job is an improvement. In that case, you should capitalize and depreciate
the repair costs as the same class of property that you have restored or remodeled
as discussed above. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
How many years do I depreciate a new furnace installed as an improvement
on residential rental property and what method do I use to compute the depreciation?
Replacement of a furnace in a residential rental property is a capital
improvement to the structure. The furnace is in the same class of property
as the property in which it is installed. Since the property is residential
rental property, the furnace is, generally, depreciated over a recovery period
of 27.5 years using the straight line method of depreciation and a mid-month
convention. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
I purchased a snowblower and a lawn mower strictly for use at a
residential apartment building I own. Can I elect the section 179 deduction
to fully deduct the costs of the snowblower and lawn mower?
You cannot claim section 179 expense for property held to produce rental
income (since it is use in connection with the furnishing of lodging). These
assets are classified as 5-year property and must be depreciated under MACRS
(Modified Accelerated Cost Recovery System).
You can claim a special depreciation allowance for qualified property you
acquired service after September 10, 2001 and before January 1, 2005. The
allowance is a depreciation deduction equal to 30% of the property's depreciable
basis. The special depreciation is figured before you calculate your regular
depreciation. To qualify for the special deduction the property must:
Be new property that is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service Before January 1, 2005.
Be property that the original use began after September 10, 2001.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 modified the
bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation deduction
is not eligible for the 30% additional first-year depreciation deduction apply
to 50% depreciation property instead of the 50% additional first-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges
We are selling rental property and have never claimed depreciation.
What do we do about this when we file our taxes?
When reporting the sale of or computing gain or loss on rental property,
you are required to make an adjustment to your basis for allowable depreciation
regardless of whether the deduction was taken. For more information refer
to Publication 544, Sale or Other Dispositions of Assets, and
the
Instructions for Form 4797, Sales of Business Property.
If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting
Method, to claim the depreciation that should have been taken. The Form
3115 must be timely filed for the same tax year in which you sell the rental
property or an earlier tax year. If you placed in service the rental property
only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax
Return, to take deductions for the claimed depreciation.
References:
12.7 Small Business/Self-Employed/Other Business : Income & Expenses
I use part of my living room as an office. Can I take a deduction for business
use of my home?
In general, if you use a part of your home for both personal and business purposes,
no expenses for business use of that part are deductible. Exceptions apply for qualified
day-care providers and for the storage of inventory or product samples used in your
business. For additional information on business use of your home, refer to Tax Topic 509, or Publication 587, Business Use of Your Home (Including Use
by Day-Care Providers).
References:
If you lease purchase a piece of equipment, like a forklift or boom truck,
do you deduct the lease or do you depreciate it?
There may be instances in which you must determine whether your payments are for
rent or for the purchase of the property. You must first determine whether your agreement
is a lease or a conditional sales contract. If, under the agreement, you acquired
or will acquire title to or equity in the property, you should treat the agreement
as a conditional sales contract. Payments made under a conditional sales contract
are not deductible as rent expense.
Whether the agreement is a conditional sales contract depends on the intent of
the parties. Determine intent based on the facts and circumstances that exist when
you make the agreement.
In general, an agreement may be considered a conditional sales contract rather
than a lease if any of the following is true:
The agreement applies part of each payment toward an equity interest that you
will receive.
You get title to the property upon the payment of a stated amount required under
the contract.
The amount you pay to use the property for a short time is a large part of the
amount you would pay to get title to the property.
You pay much more than the current fair rental value for the property.
You have an option to buy the property at a nominal price compared to the value
of the property when you may exercise the option. Determine this value when you make
the agreement.
You have an option to buy the property at a nominal price compared to the total
amount you have to pay under the lease.
The lease designates some part of the payments as interest, or part of the payments
are easy to recognize as interest.
References:
If you lease office equipment and machinery with the option to buy, when
do you depreciate the purchase price?
If you lease equipment with the option to later buy the equipment, you must first
determine whether your agreement is a lease agreement or a conditional sales contract.
If, under the agreement, you acquired or will acquire title to or equity in the property,
you should treat the agreement as a conditional sales contract. Payments made under
a conditional sales contract are not deductible as rent expense. You would start depreciating
the equipment on the date you acquired the equipment.
Whether the agreement is a conditional sales contract depends on the intent of
the parties. Determine intent based on the facts and circumstances that exist when
you make the agreement
In general, an agreement may be considered a conditional sales contract rather
than a lease if any of the following is true.
The agreement applies part of each payment toward an equity interest that you
will receive.
You get title to the property upon the payment of a stated amount required under
the contract.
The amount you pay to use the property for a short time is a large part of the
amount you would pay to get title to the property.
You pay much more than the current fair rental value for the property.
You have an option to buy the property at a nominal price compared to the value
of the property when you may exercise the option. Determine this value when you make
the agreement.
You have an option to buy the property at a nominal price compared to the total
amount you have to pay under the lease.
The lease designates some part of the payments as interest, or part of the payments
are easy to recognize as interest.
References:
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