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`Department of the Treasury
`Internal Revenue Service
`
`Publication 946
`
`Cat. No. 13081F
`
`How To
`Depreciate
`Property
`• Section 179 Deduction
`• Special Depreciation
`Allowance
`• MACRS
`• Listed Property
`
`For use in preparing
`2004 Returns
`
`Get forms and other information
`faster and easier by:
`Internet • www.irs.gov
`FAX • 703–368–9694 (from your fax machine)
`
`Contents
`What’s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
`
`Important Reminders . . . . . . . . . . . . . . . . . . . . . . .
`
`Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
`
`2
`
`2
`
`2
`
`3
`3
`5
`7
`
`1. Overview of Depreciation . . . . . . . . . . . . . . . . . .
`What Property Can Be Depreciated? . . . . . . . . .
`What Property Cannot Be Depreciated? . . . . . . .
`When Does Depreciation Begin and End? . . . . .
`Can You Use MACRS To Depreciate Your
`Property? . . . . . . . . . . . . . . . . . . . . . . . . . . .
`What Is the Basis of Your Depreciable
`Property? . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
`How Do You Treat Improvements? . . . . . . . . . . . 12
`Do You Have To File Form 4562? . . . . . . . . . . . . 12
`How Do You Correct Depreciation
`Deductions? . . . . . . . . . . . . . . . . . . . . . . . . . 13
`
`7
`
`2. Electing the Section 179 Deduction . . . . . . . . . . 14
`What Property Qualifies? . . . . . . . . . . . . . . . . . . 15
`What Property Does Not Qualify? . . . . . . . . . . . . 16
`How Much Can You Deduct? . . . . . . . . . . . . . . . 17
`How Do You Elect the Deduction? . . . . . . . . . . . 22
`When Must You Recapture the Deduction? . . . . 22
`
`3. Claiming the Special Depreciation
`Allowance (or Liberty Zone Depreciation
`Allowance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
`What Is Qualified Property? . . . . . . . . . . . . . . . . 23
`What Is Qualified Liberty Zone Property? . . . . . . 25
`How Much Can You Deduct? . . . . . . . . . . . . . . . 27
`How Can You Elect Not To Claim an
`Allowance? . . . . . . . . . . . . . . . . . . . . . . . . . 28
`When Must You Recapture an
`Allowance? . . . . . . . . . . . . . . . . . . . . . . . . . 28
`
`4. Figuring Depreciation Under MACRS . . . . . . . . 28
`Which Depreciation System (GDS or ADS)
`Applies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
`Which Property Class Applies Under
`GDS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
`What Is the Placed-in-Service Date? . . . . . . . . . 32
`What Is the Basis for Depreciation? . . . . . . . . . . 32
`Which Recovery Period Applies? . . . . . . . . . . . . 32
`Which Convention Applies? . . . . . . . . . . . . . . . . 34
`Which Depreciation Method Applies? . . . . . . . . . 34
`How Is the Depreciation Deduction
`Figured? . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
`How Do You Use General Asset
`Accounts? . . . . . . . . . . . . . . . . . . . . . . . . . . 46
`When Do You Recapture MACRS
`Depreciation? . . . . . . . . . . . . . . . . . . . . . . . . 50
`
`5. Additional Rules for Listed Property . . . . . . . . . 51
`What Is Listed Property? . . . . . . . . . . . . . . . . . . 51
`Can Employees Claim a Deduction? . . . . . . . . . . 53
`What Is the Business-Use Requirement? . . . . . . 53
`Do the Passenger Automobile Limits Apply? . . . . 57
`What Records Must Be Kept? . . . . . . . . . . . . . . . 62
`How Is Listed Property Information
`Reported? . . . . . . . . . . . . . . . . . . . . . . . . . . 63
`
`6. Comprehensive Example . . . . . . . . . . . . . . . . . . 64
`
`7. How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . 69
`
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`Appendix A — MACRS Percentage Table
`Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
`
`Appendix B — Table of Class Lives and
`Recovery Periods . . . . . . . . . . . . . . . . . . . . . . . 97
`
`Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
`
`Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
`
`What’s New
`Increased section 179 deduction dollar limit. The max-
`imum amount you can elect to deduct for most section 179
`property you placed in service during 2004 is $102,000.
`This limit is reduced by the amount by which the cost of the
`property placed in service during the tax year exceeds
`$410,000. See Dollar Limits under How Much Can You
`Deduct in chapter 2.
`
`Section 179 deduction limit for sport utility and certain
`other vehicles. The maximum section 179 expense de-
`duction for sport utility vehicles and certain other vehicles
`placed in service after October 22, 2004, is $25,000. For
`more information, see Section 179 Deduction Limit for
`Sport Utility and Certain Other Vehicles in chapter 2.
`
`Bonus depreciation for aircraft. Certain non-commer-
`cial aircraft placed in service before January 1, 2006, are
`eligible for the special depreciation allowances. See What
`Is Qualified Property in chapter 3.
`
`Election out for qualified New York Liberty Zone (Lib-
`erty Zone) leasehold improvement property. You can
`elect not to treat certain qualified Liberty Zone leasehold
`improvement property as 5-year property. For more infor-
`mation, see Which Property Class Applies Under GDS in
`chapter 4.
`
`Recovery period for qualified leasehold improvement
`and qualified restaurant property. Qualified leasehold
`improvement property and qualified restaurant property
`placed in service after October 22, 2004, and before Janu-
`ary 1, 2006, are treated as 15-year property under
`MACRS. See Figuring Depreciation Under MACRS in
`chapter 4.
`
`Depreciation deduction for property acquired in a non-
`taxable exchange. New guidance has been issued for
`depreciating MACRS property acquired after February 27,
`2004 in a like-kind exchange or involuntary conversion.
`See Figuring the Deduction for Property Acquired in a
`Nontaxable Exchange in chapter 4.
`
`Depreciation limits on business vehicles. The total
`section 179 deduction and depreciation (including the spe-
`cial depreciation allowance) you can deduct for a passen-
`ger automobile (that is not an electric vehicle or a truck or
`van) you use in your business and first placed in service in
`2004 is generally $10,610. The maximum deduction for an
`electric vehicle is generally $31,830. The maximum deduc-
`tion you can take for a truck or van you use in your
`business and first placed in service in 2004 is generally
`$10,910. See Maximum Depreciation Deduction in chapter
`5.
`
`Page 2
`
`Important Reminders
`Photographs of missing children. The Internal Reve-
`nue Service is a proud partner with the National Center for
`Missing and Exploited Children. Photographs of missing
`children selected by the Center may appear in this publica-
`tion on pages that would otherwise be blank. You can help
`bring these children home by looking at the photographs
`and calling 1-800-THE-LOST (1-800-843-5678) if you rec-
`ognize a child.
`
`Additional special depreciation allowances. The addi-
`tional special depreciation allowances will not apply to
`most property placed in service after December 31, 2004.
`For more information, see Claiming the Special Deprecia-
`tion Allowance (or Liberty Zone Depreciation Allowance) in
`chapter 3.
`
`Introduction
`This publication explains how you can recover the cost of
`business or income-producing property through deduc-
`tions for depreciation (the special depreciation allowance,
`the special Liberty Zone depreciation allowance, and de-
`ductions under the Modified Accelerated Cost Recovery
`System). It also explains how you can elect to take a
`section 179 deduction, instead of depreciation deductions,
`for certain property and the additional rules for listed prop-
`erty. In addition, the publication describes how to figure
`depreciation and how to fill out Form 4562, Depreciation
`and Amortization.
`The depreciation methods discussed in this publi-
`!
`cation generally do not apply to property placed in
`service before 1987. If you want information
`CAUTION
`about depreciating such property, see Publication 534.
`
`Definitions. Many of the terms used in this publication are
`defined in the Glossary near the end of the publication.
`Glossary terms used in each discussion under the major
`headings are listed before the beginning of each discus-
`sion throughout the publication.
`
`Do you need a different publication? The following ta-
`ble shows where you can get more detailed information
`when depreciating certain types of property.
`
`For information
`on depreciating:
`A car
`
`Residential rental
`property
`Office space in
`your home
`Farm property
`
`See Publication:
`
`463, Travel, Entertainment, Gift, and
`Car Expenses
`
`527, Residential Rental Property
`
`587, Business Use of Your Home
`(Including Use by Daycare Providers)
`225, Farmer’s Tax Guide
`
`Comments and suggestions. We welcome your com-
`ments about this publication and your suggestions for
`future editions.
`You can write to us at the following address:
`
`

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`
`Internal Revenue Service
`Business Forms and Publications Branch
`SE:W:CAR:MP:T:B
`1111 Constitution Ave. NW, IR-6406
`Washington, DC 20224
`
`We respond to many letters by telephone. Therefore, it
`would be helpful if you would include your daytime phone
`number, including the area code, in your correspondence.
`You can email us at *taxforms@irs.gov. (The asterisk
`must be included in the address.) Please put “Publications
`Comment” on the subject line. Although we cannot re-
`spond individually to each email, we do appreciate your
`feedback and will consider your comments as we revise
`our tax products.
`
`551 Basis of Assets
`
`Form (and Instructions)
`
`❏ Sch C (Form 1040) Profit or Loss From Business
`❏ Sch C-EZ (Form 1040) Net Profit From Business
`2106 Employee Business Expenses
`2106-EZ Unreimbursed Employee Business
`Expenses
`3115 Application for Change in Accounting Method
`4562 Depreciation and Amortization
`
`See chapter 7 for information about getting publications
`and forms.
`
`1.
`Overview of
`Depreciation
`
`Introduction
`Depreciation is an annual income tax deduction that allows
`you to recover the cost or other basis of certain property
`over the time you use the property. It is an allowance for
`the wear and tear, deterioration, or obsolescence of the
`property.
`This chapter discusses the general rules for depreciat-
`ing property. It explains the following.
`• What property can be depreciated.
`• What property cannot be depreciated.
`• When depreciation begins and ends.
`• Whether MACRS can be used to figure depreciation.
`• What the basis of property is.
`• How to treat improvements.
`• When to file Form 4562.
`• How to correct depreciation claimed incorrectly in a
`previous year.
`
`Useful Items
`You may want to see:
`
`Publication
`
`534 Depreciating Property Placed in Service
`Before 1987
`535 Business Expenses
`538 Accounting Periods and Methods
`
`What Property Can Be
`Depreciated?
`Terms you may need to know
`(see Glossary):
`
`Adjusted basis
`Basis
`Commuting
`Disposition
`Fair market value
`Intangible property
`Listed property
`Placed in service
`Tangible property
`Term interest
`Useful life
`
`You can depreciate most types of tangible property (except
`land), such as buildings, machinery, vehicles, furniture,
`and equipment. You also can depreciate certain intangible
`property, such as patents, copyrights, and computer
`software.
`To be depreciable, the property must meet all the follow-
`ing requirements.
`• It must be property you own.
`• It must be used in your business or income-produc-
`ing activity.
`• It must have a determinable useful life.
`• It must be expected to last more than one year.
`The following discussions provide information about these
`requirements.
`
`Chapter 1 Overview of Depreciation
`
`Page 3
`
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`Property You Own
`To claim depreciation, you usually must be the owner of
`the property. You are considered as owning property even
`if it is subject to a debt.
`
`Example 1. You made a down payment on rental prop-
`erty and assumed the previous owner’s mortgage. You
`own the property and you can depreciate it.
`
`Example 2. You bought a new van that you will use only
`for your courier business. You will be making payments on
`the van over the next 5 years. You own the van and you
`can depreciate it.
`
`Leased property. You can depreciate leased property
`only if you retain the incidents of ownership (explained
`below) in the property. This means you bear the burden of
`exhaustion of the capital investment in the property. There-
`fore, if you lease property from someone to use in your
`trade or business or for the production of income, you
`generally cannot depreciate its cost because you do not
`retain the incidents of ownership. You can, however, de-
`preciate any capital improvements you make to the prop-
`erty. See How Do You Treat Improvements later in this
`chapter and Additions and Improvements under Which
`Recovery Period Applies in chapter 4.
`If you lease property to someone, you generally can
`depreciate its cost even if the lessee (the person leasing
`from you) has agreed to preserve, replace, renew, and
`maintain the property. However, if the lease provides that
`the lessee is to maintain the property and return to you the
`same property or its equivalent in value at the expiration of
`the lease in as good condition and value as when leased,
`you cannot depreciate the cost of the property.
`Incidents of ownership. Incidents of ownership in
`property include the following.
`• The legal title to the property.
`• The legal obligation to pay for the property.
`• The responsibility to pay maintenance and operating
`expenses.
`• The duty to pay any taxes on the property.
`• The risk of loss if the property is destroyed, con-
`demned, or diminished in value through obsoles-
`cence or exhaustion.
`
`your cooperative stock after its first offering, figure
`the depreciable basis of this property as follows.
`
`a. Multiply your cost per share by the total number of
`outstanding shares.
`b. Add to the amount figured in (a) any mortgage
`debt on the property on the date you bought the
`stock.
`c. Subtract from the amount figured in (b) any mort-
`gage debt that is not for the depreciable real prop-
`erty, such as the part for the land.
`
`2. Subtract from the amount figured in (1) any deprecia-
`tion for space owned by the corporation that can be
`rented but cannot be lived in by tenant-stockholders.
`3. Divide the number of your shares of stock by the
`total number of shares outstanding, including any
`shares held by the corporation.
`4. Multiply the result of (2) by the percentage you fig-
`ured in (3). This is your depreciation on the stock.
`Your depreciation deduction for the year cannot be
`more than the part of your adjusted basis in the stock of the
`corporation that is allocable to your business or
`income-producing property.
`
`Example. You figure your share of the cooperative
`housing corporation’s depreciation to be $30,000. Your
`adjusted basis in the stock of the corporation is $50,000.
`You use one half of your apartment solely for business
`purposes. Your depreciation deduction for the stock for the
`year cannot be more than $25,000 (1/2 of $50,000).
`Change to business use. If you change your coopera-
`tive apartment to business use, figure your allowable de-
`preciation as explained earlier. The basis of all the
`depreciable real property owned by the cooperative hous-
`ing corporation is the smaller of the following amounts.
`• The fair market value of the property on the date you
`change your apartment to business use. This is con-
`sidered to be the same as the corporation’s adjusted
`basis minus straight line depreciation, unless this
`value is unrealistic.
`• The corporation’s adjusted basis in the property on
`that date. Do not subtract depreciation when figuring
`the corporation’s adjusted basis.
`
`Life tenant. Generally, if you hold business or investment
`property as a life tenant, you can depreciate it as if you
`were the absolute owner of the property. However, see
`Certain term interests in property under Excepted Prop-
`erty, later.
`
`If you bought the stock after its first offering, the
`corporation’s adjusted basis in the property is the amount
`figured in (1), above. The fair market value of the property
`is considered to be the same as the corporation’s adjusted
`basis figured in this way minus straight line depreciation,
`unless the value is unrealistic.
`For a discussion of fair market value and adjusted basis,
`Cooperative apartments. If you are a tenant-stockholder
`see Publication 551.
`in a cooperative housing corporation and use your cooper-
`ative apartment in your business or for the production of Property Used in Your Business or
`income, you can depreciate your stock in the corporation,
`Income-Producing Activity
`even though the corporation owns the apartment.
`Figure your depreciation deduction as follows.
`To claim depreciation on property, you must use it in your
`business or income-producing activity. If you use property
`to produce income (investment use), the income must be
`
`1. Figure the depreciation for all the depreciable real
`property owned by the corporation. If you bought
`
`Page 4
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`Chapter 1 Overview of Depreciation
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`taxable. You cannot depreciate property that you use
`solely for personal activities.
`Partial business or investment use. If you use property
`for business or investment purposes and for personal
`purposes, you can deduct depreciation based only on the
`business or investment use. For example, you cannot
`deduct depreciation on a car used only for commuting,
`personal shopping trips, family vacations, driving children
`to and from school, or similar activities.
`You must keep records showing the business,
`investment, and personal use of your property.
`For more information on the records you must
`RECORDS
`keep for listed property, such as a car, see What Records
`Must Be Kept in chapter 5.
`
`• They qualify as property used in your business.
`• Title to the containers does not pass to the buyer.
`
`To determine if these requirements are met, consider
`the following questions.
`• Does your sales contract, sales invoice, or other
`type of order acknowledgment indicate whether you
`have retained title?
`• Does your invoice treat the containers as separate
`items?
`• Do any of your records state your basis in the con-
`tainers?
`
`Although you can combine business and invest-
`!
`ment use of property when figuring depreciation Property Having a Determinable
`deductions, do not treat investment use as quali-
`Useful Life
`CAUTION
`fied business use when determining whether the
`business-use requirement for listed property is met. For
`To be depreciable, your property must have a determina-
`information about qualified business use of listed property,
`ble useful life. This means that it must be something that
`see What Is the Business-Use Requirement in chapter 5.
`wears out, decays, gets used up, becomes obsolete, or
`loses its value from natural causes.
`
`Property Lasting More Than One Year
`To be depreciable, property must have a useful life that
`extends substantially beyond the year you place it in serv-
`ice.
`
`Example. You maintain a library for use in your profes-
`sion. You can depreciate it. However, if you buy technical
`books, journals, or information services for use in your
`business that have a useful life of one year or less, you
`cannot depreciate them. Instead, you deduct their cost as
`a business expense.
`
`Office in the home. If you use part of your home as an
`office, you may be able to deduct depreciation on that part
`based on its business use. For information about depreci-
`ating your home office, see Publication 587.
`Inventory. You cannot depreciate inventory because it is
`not held for use in your business. Inventory is any property
`you hold primarily for sale to customers in the ordinary
`course of your business.
`If you are a rent-to-own dealer, you may be able to
`depreciate certain property held in your business. See
`Rent-to-own dealer under Which Property Class Applies
`Under GDS in chapter 4.
`In some cases, it is not clear whether property is held for
`sale (inventory) or for use in your business. If it is unclear,
`examine carefully all the facts in the operation of the
`particular business. The following example shows how a What Property Cannot Be
`careful examination of the facts in two similar situations
`Depreciated?
`results in different conclusions.
`Terms you may need to know
`(see Glossary):
`
`Example. Maple Corporation is in the business of leas-
`ing cars. At the end of their useful lives, when the cars are
`no longer profitable to lease, Maple sells them. Maple does
`not have a showroom, used car lot, or individuals to sell the
`cars. Instead, it sells them through wholesalers or by
`similar arrangements in which a dealer’s profit is not in-
`tended or considered. Maple can depreciate the leased
`cars because the cars are not held primarily for sale to
`customers in the ordinary course of business, but are
`leased.
`If Maple buys cars at wholesale prices, leases them for
`a short time, and then sells them at retail prices or in sales
`in which a dealer’s profit is intended, the cars are treated
`as inventory and are not depreciable property. In this
`situation, the cars are held primarily for sale to customers
`in the ordinary course of business.
`Containers. Generally, containers for the products you
`sell are part of inventory and you cannot depreciate them.
`However, you can depreciate containers used to ship your
`products if they have a life longer than one year and meet
`the following requirements.
`
`Amortization
`Basis
`Goodwill
`Intangible property
`Remainder interest
`Term interest
`
`Certain property cannot be depreciated. This includes the
`following.
`
`Land
`You cannot depreciate the cost of land because land does
`not wear out, become obsolete, or get used up. The cost of
`
`Chapter 1 Overview of Depreciation
`
`Page 5
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`land generally includes the cost of clearing, grading, plant-
`ing, and landscaping.
`
`Land preparation costs. Although you cannot depreci-
`ate land, you can depreciate certain costs (such as land-
`scaping costs) incurred in preparing land for business use.
`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.
`
`Example. You constructed a new building for use in
`your business and paid for grading, clearing, seeding, and
`planting bushes and trees. Some of the bushes and trees
`were planted right next to the building, while others were
`planted around the outer border of the lot. If you replace
`the building, you would have to destroy the bushes and
`trees right next to it. These bushes and trees are closely
`associated with the building, so they have a determinable
`useful life. Therefore, you can depreciate them. Add your
`other land preparation costs to the basis of your land
`because they have no determinable life and you cannot
`depreciate them.
`
`Excepted Property
`Even if the requirements explained in the preceding dis-
`cussions are met, you cannot depreciate the following
`property.
`• Property placed in service and disposed of in the
`same year. (Determining when property is placed in
`service is explained later.)
`• Equipment used to build capital improvements. You
`must add otherwise allowable depreciation on the
`equipment during the period of construction to the
`basis of your improvements. (See Uniform Capitali-
`zation Rules in Publication 551.)
`• Section 197 intangibles.
`• Certain term interests.
`
`Section 197 intangibles. You cannot depreciate section
`197 intangibles. Instead, you must amortize their cost. For
`information, see chapter 9 in Publication 535.
`Section 197 intangibles include the following types of
`property.
`
`1. Franchises.
`2. Certain agreements not to compete.
`3. Goodwill.
`4. Trademarks or trade names.
`5. The following property, unless you created it other
`than in connection with acquiring assets constituting
`a business or a substantial part of a business.
`
`a. Patents and copyrights.
`b. Customer or subscription lists, location contracts,
`and insurance expirations.
`c. Designs, patterns, and formats, including certain
`computer software.
`
`Page 6
`
`Chapter 1 Overview of Depreciation
`
`Computer software. Computer software includes all
`programs designed to cause a computer to perform a
`desired function. It also includes any data base or similar
`item in the public domain and incidental to the operation of
`qualifying software. Computer software is a section 197
`intangible only if you acquired it in connection with the
`acquisition of assets constituting a business or a substan-
`tial part of a business.
`However, computer software is not a section 197 intan-
`gible and can be depreciated, even if acquired in connec-
`tion with the acquisition of a business, if it meets all of the
`following tests.
`• It is readily available for purchase by the general
`public.
`• It is subject to a nonexclusive license.
`• It has not been substantially modified.
`
`Note. If the software meets the tests above, it may also
`qualify for the section 179 deduction and the special depre-
`ciation allowance, discussed later.
`
`Certain term interests in property. You cannot depreci-
`ate a term interest in property created or acquired after
`July 27, 1989, for any period during which the remainder
`interest is held, directly or indirectly, by a person related to
`you.
`Related persons. For a description of related persons,
`see Related persons in the discussion on property owned
`or used in 1986 under Can You Use MACRS To Depreci-
`ate Your Property later in this chapter. For this purpose,
`however, treat as related persons only the relationships
`listed in items (1) through (10) of that discussion and
`substitute “50%” for “10%” each place it appears.
`Basis adjustments. If you would be allowed a depreci-
`ation deduction for a term interest in property except that
`the holder of the remainder interest is related to you, you
`generally must reduce your basis in the term interest by
`any depreciation or amortization not allowed.
`If you hold the remainder interest, you generally must
`increase your basis in that interest by the depreciation not
`allowed to the term interest holder. However, do not in-
`crease your basis for depreciation not allowed for periods
`during which either of the following situations applies.
`• The term interest is held by an organization exempt
`from tax.
`• The term interest is held by a nonresident alien indi-
`vidual or foreign corporation, and the income from
`the term interest is not effectively connected with the
`conduct of a trade or business in the United States.
`
`Exceptions. The above rules do not apply to the holder
`of a term interest in property acquired by gift, bequest, or
`inheritance. They also do not apply to the holder of divi-
`dend rights that were separated from any stripped pre-
`ferred stock if the rights were purchased after April 30,
`1993, or to a person whose basis in the stock is determined
`by reference to the basis in the hands of the purchaser.
`
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`When Does Depreciation
`Begin and End?
`Terms you may need to know
`(see Glossary):
`
`Basis
`Exchange
`Placed in service
`
`service when you began using it as your home. You can
`begin to claim depreciation in the year you converted it to
`rental property because its use changed to an income-pro-
`ducing use at that time.
`
`Idle Property
`Continue to claim a deduction for depreciation on property
`used in your business or for the production of income even
`if it is temporarily idle. For example, if you stop using a
`machine because there is a temporary lack of a market for
`a product made with that machine, continue to deduct
`depreciation on the machine.
`
`You begin to depreciate your property when you place it in Cost or Other Basis Fully Recovered
`service for use in your trade or business or for the produc-
`tion of income. You stop depreciating property either when
`You stop depreciating property when you have fully recov-
`you have fully recovered your cost or other basis or when
`ered your cost or other basis. You recover your basis when
`you retire it from service, whichever happens first.
`your section 179 and allowed or allowable depreciation
`deductions equal your cost or investment in the property.
`See What Is the Basis of Your Depreciable Property, later.
`
`Placed in Service
`You place property in service when it is ready and avail- Retired From Service
`able for a specific use, whether in a business activity, an
`income-producing activity, a tax-exempt activity, or a per-
`You stop depreciating property when you retire it from
`sonal activity. Even if you are not using the property, it is in
`service, even if you have not fully recovered its cost or
`service when it is ready and available for its specific use.
`other basis. 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.
`• You sell or exchange the property.
`• You convert the property to personal use.
`• You abandon the property.
`• You transfer the property to a supplies or scrap ac-
`count.
`• The property is destroyed.
`
`Example 1. Donald Steep bought a machine for his
`business. The machine was delivered last year. However,
`it was not installed and operational until this year. It is
`considered placed in service this year. If the machine had
`been ready and available for use when it was delivered, it
`would be considered placed in service last year even if it
`was not actually used until this year.
`
`Example 2. On April 6, Sue Thorn bought a house to
`use as residential rental property. She made several re-
`pairs and had it ready for rent on July 5. At that time, she
`began to advertise it for rent in the local newspaper. The
`house is considered placed in service in July when it was
`ready and available for rent. She can begin to depreciate it
`in July.
`
`Example 3. James Elm is a building contractor who
`specializes in constructing office buildings. He bought a
`truck last year that had to be modified to lift materials to
`second-story levels. The installation of the lifting equip-
`ment was completed and James accepted delivery of the
`modified truck on January 10 of this year. The truck was
`placed in service on January 10, the date it was ready and
`available to perform the function for which it was bought.
`
`Conversion to business use. If you place property in
`service in a personal activity, you cannot claim deprecia-
`tion. However, if you change the property’s use to use in a
`business or income-producing activity, then you can begin
`to depreciate it at the time of the change. You place the
`property in service on the date of the change.
`
`Example. You bought a home and used it as your
`personal home several years before you converted it to
`rental property. Although its specific use was personal and
`no depreciation was allowable, you placed the home in
`
`Can You Use MACRS To
`Depreciate Your Property?
`Terms you may need to know
`(see Glossary):
`
`Adjusted basis
`Basis
`Convention
`Exchange
`Fiduciary
`Grantor
`Intangible property
`Nonresidential real property
`Placed in service
`Related persons
`
`Chapter 1 Overview of Depreciation
`
`Page 7
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`
`Residential rental property
`Salvage value
`Section 1245 property
`Section 1250 property
`Standard mileage rate
`Straight line method
`Unit-of-production method
`Useful life
`
`You must use the Modified Accelerated Cost Recovery
`System (MACRS) to depreciate most property. MACRS is
`discussed in chapter 4.
`You cannot use MACRS to depreciate the following
`property.
`• P