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previous page Previous Page: Publication 527 - Residential Rental Property (Including Rental of Vacation Homes) - Claiming the Special Depreciation Allowance
next page Next Page: Publication 527 - Residential Rental Property (Including Rental of Vacation Homes) - Claiming the Correct Amount of Depreciation
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p527-005.htm#en_us_publink1000219071

MACRS Depreciation(p8)


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previous topic occurrence Modified Accelerated Cost Recovery System next topic occurrence

Most business and investment property placed in service after 1986 is depreciated using MACRS.
This section explains how to determine which MACRS depreciation system applies to your property. It also discusses other information you need to know before you can figure depreciation under MACRS. This information includes the property's:
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Depreciation Systems(p9)


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MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally, you must use GDS for property used in most rental activities, unless you elect ADS.
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Excluded Property(p9)


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Excluded Property

You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2009 if it had been previously placed in service before 1987 when MACRS became effective.
Generally, 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. However, the property is not excluded if your 2009 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1.
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Electing ADS(p9)


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Electing ADS

If you choose, you can use the ADS method for most property. Under ADS, you use the straight line method of depreciation.
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. However, the election applies on a property-by-property basis for residential rental property and nonresidential real property.
For property placed in service during 2009, you elect to use ADS by entering the depreciation on Form 4562, Part III, line 20.
Once you elect to use ADS, you cannot change your election.
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Property Classes Under GDS(p9)


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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. The property class generally determines the depreciation method, recovery period, and convention. The property classes under GDS are:
Under MACRS, property that you placed in service during 2009 in your rental activities generally falls into one of the following classes.
EIC
The other property classes do not generally apply to property used in rental activities. These classes are not discussed in this publication. See Publication 946 for more information.
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Recovery Periods  
Under GDS(p9)


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previous topic occurrence Recovery Periods Under GDS next topic occurrence

The recovery period of property is the number of years over which you recover its cost or other basis. The recovery periods are generally longer under ADS than GDS.
The recovery period of property depends on its property class. Under GDS, the recovery period of an asset is generally the same as its property class.
Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. See Table 2-1 for recovery periods of property commonly used in residential rental activities.
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Qualified Indian reservation property.(p9)


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Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. For more information, see chapter 4 of Publication 946.
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Additions or improvements to property.(p9)


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Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes.
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.
The recovery period for an addition or improvement to property begins on the later of:
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Example.(p10)

You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. You built an addition onto the house and placed it in service in 2009. You must use MACRS for the addition. Under GDS, the addition is depreciated as residential rental property over 27.5 years.
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Table 2-1. MACRS Recovery Periods for Property Used in  
Rental Activities

 MACRS Recovery Period  
Type of PropertyGeneral
Depreciation
System
Alternative
Depreciation
System
 
Computers and their peripheral equipment5 years5 years 
Office machinery, such as:
    Typewriters
    Calculators
    Copiers
5 years6 years 
Automobiles5 years5 years 
Light trucks5 years5 years 
Appliances, such as:
    Stoves
    Refrigerators
5 years9 years 
Carpets5 years9 years 
Furniture used in rental property5 years9 years 
Office furniture and equipment, such as:
    Desks
    Files
7 years10 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 years12 years 
Roads15 years20 years 
Shrubbery15 years20 years 
Fences15 years20 years 
Residential rental property (buildings or structures)
    and structural components such as furnaces,
    waterpipes, venting, etc.
27.5 years40 years 
Additions and improvements, such as a new roofThe 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.  
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Conventions(p10)


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previous topic occurrence Conventions next topic occurrence

A convention is a method established under MACRS to set the beginning and end of the recovery period. 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.
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Mid-month convention.(p10)


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A mid-month convention is used for all residential rental property and nonresidential real property. 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.
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Mid-quarter convention.(p10)


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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.
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.
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Example.(p10)

During the tax year, Tom Martin purchased the following items to use in his rental property. He elects not to claim the special depreciation allowance, discussed earlier. Tom uses the calendar year as his tax year. The total basis of all property placed in service that year is $1,300. The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Tom must use the mid-quarter convention instead of the half-year convention for all three items.
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Half-year convention.(p10)


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The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. 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.
If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery period.
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Figuring Your Depreciation Deduction(p10)


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Your Depreciation Deduction

You can figure your MACRS depreciation deduction in one of two ways. The deduction is substantially the same both ways. You can either:
In this publication we will use the percentage tables. For instructions on how to compute the deduction, see chapter 4 of Publication 946.
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Residential rental property.(p10)


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You must use the straight line method and a mid-month convention for residential rental property. 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 on this page).
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5-, 7-, or 15-year property.(p10)


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For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. However, in limited cases you must use the mid-quarter convention, if it applies. For property in the 15-year class, use the 150% declining balance method and a half-year convention.
You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. 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. You make this election on Form 4562. In Part III, column (f), enter "150 DB." Once you make this election, you cannot change to another method.
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.
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. 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. You elect the straight line method on Form 4562. In Part III, column (f), enter "S/L." Once you make this election, you cannot change to another method.
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MACRS Percentage Tables(p10)


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MACRS Percentage Tables

You can use the percentages in Table 2-2 (on the next page) to compute annual depreciation under MACRS. The tables show the percentages for the first few years or until the change to the straight line method is made. See Appendix A of Publication 946 for complete tables. 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.
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.
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How to use the percentage tables.(p10)


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You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period.
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:
  1. Depreciation allowed or allowable, or
  2. An addition or improvement that is depreciated as a separate item of property.
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. 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 on this page under Figuring Your Depreciation Deduction. See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4.
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Unadjusted basis.(p10)
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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.
However, you do reduce your original basis by other amounts claimed on the property, including: For more information, see Publication 946, chapter 4.
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Table 2-2 Text DescriptionTable 2-2  
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Tables 2-2a, 2-2b, and 2-2c.(p10)


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The percentages in these tables take into account the half-year and mid-quarter conventions. Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). 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.
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Example 1.(p11)

You purchased a stove and refrigerator and placed them in service in June. Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Both are 5-year property. Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. For that year your depreciation deduction is $120 ($600 × .20) for the stove and $200 ($1,000 × .20) for the refrigerator.
For Year 2, the depreciation percentage is 32%. That year's depreciation deduction will be $192 ($600 × .32) for the stove and $320 ($1,000 × .32) for the refrigerator.
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Example 2.(p11)

Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. 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 × .40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator.
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%. Your depreciation deduction for the refrigerator is $50 ($1,000 × .05).
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%. For that year, your depreciation deduction for the stove is $150 ($600 × .25).
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Table 2-2d.(p11)


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Use this table for residential rental property. Find the row for the month that you placed the property in service. Use the percentages listed for that month to figure your depreciation deduction. The mid-month convention is taken into account in the percentages shown in the table. Continue to use the same row (month) under the column for the appropriate year.
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Example.(p11)

You purchased a single family rental house for $185,000 and placed it in service on February 8. The sales contract showed that the building cost $160,000 and the land cost $25,000. Your basis for depreciation is its original cost, $160,000. Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3.182%. That year's depreciation deduction is $5,091 ($160,000 × .03182).
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Figuring MACRS Depreciation Under ADS(p11)


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MACRS Depreciation Under ADS

Table 2-1, earlier, shows the ADS recovery periods for property used in rental activities.
See Appendix B in Publication 946 for other property. If your property is not listed in Appendix B, it is considered to have no class life. Under ADS, personal property with no class life is depreciated using a recovery period of 12 years.
Use the mid-month convention for residential rental property and nonresidential real property. For all other property, use the half-year or mid-quarter convention, as appropriate.
previous pagePrevious Page: Publication 527 - Residential Rental Property (Including Rental of Vacation Homes) - Claiming the Special Depreciation Allowance
next pageNext Page: Publication 527 - Residential Rental Property (Including Rental of Vacation Homes) - Claiming the Correct Amount of Depreciation
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication