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IRS.gov Website
Publication 527
taxmap/pubs/p527-003.htm#en_us_publink1000219022

Chapter 2
Depreciation of Rental Property(p5)


You recover the cost of income producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.
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. You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense.
You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange.
You may have to use Form 4562 to figure and report your depreciation. See Which Forms To Use in chapter 3. Also see Pub. 946.
taxmap/pubs/p527-003.htm#en_us_publink1000219023

Section 179 deduction.(p5)

rule
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. This deduction is not allowed for property used in connection with residential rental property. See chapter 2 of Pub. 946.
taxmap/pubs/p527-003.htm#en_us_publink1000219024

Alternative minimum tax (AMT).(p5)

rule
If you use accelerated depreciation, you may be subject to the AMT. 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).
The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting).
To find out if you are subject to the AMT, see the Instructions for Form 6251.
taxmap/pubs/p527-003.htm#en_us_publink1000219025

The Basics(p6)

rule
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.
taxmap/pubs/p527-003.htm#en_us_publink1000219026

What Rental Property Can Be Depreciated?(p6)

rule
You can depreciate your property if it meets all the following requirements.
taxmap/pubs/p527-003.htm#en_us_publink1000219027

Property you own.(p6)

rule
To claim depreciation, you usually must be the owner of the property. You are considered to be the owner of property even if it is subject to a debt.
taxmap/pubs/p527-003.htm#en_us_publink1000219028
Rented property.(p6)
Generally, if you pay rent for property, you cannot depreciate that property. Usually, only the owner can depreciate it. However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. See Additions or improvements to property, later in this chapter, under Recovery Periods Under GDS.
taxmap/pubs/p527-003.htm#en_us_publink1000219029
Cooperative apartments.(p6)
If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can depreciate your stock in the corporation. See chapter 4, Special Situations.
taxmap/pubs/p527-003.htm#en_us_publink1000219030

Property having a determinable useful life.(p6)

rule
To be depreciable, your property must have a determinable useful life. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
taxmap/pubs/p527-003.htm#en_us_publink1000219031

What Rental Property Cannot Be Depreciated?(p6)

rule
Certain property cannot be depreciated. This includes land and certain excepted property.
taxmap/pubs/p527-003.htm#en_us_publink1000219032

Land.(p6)

rule
You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. But if it does, the loss is accounted for upon disposition. The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. You may, however, be able to depreciate certain land preparation costs, if the costs are so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property.
taxmap/pubs/p527-003.htm#en_us_publink1000219033

Example.(p6)

You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. If you replace the house, you would have to destroy the bushes and trees right next to it. These bushes and trees are closely associated with the house, 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.
taxmap/pubs/p527-003.htm#en_us_publink1000219034

Excepted property.(p6)

rule
Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated, you cannot depreciate the following property.For more information, see chapter 1 of Pub. 946.
taxmap/pubs/p527-003.htm#en_us_publink1000219035

When Does Depreciation Begin and End?(p6)

rule
You begin to depreciate your rental property when you place it in service for the production of income. 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.
taxmap/pubs/p527-003.htm#en_us_publink1000219036

Placed in Service(p6)

rule
You place property in service in a rental activity when it is ready and available for a specific use in that activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.
taxmap/pubs/p527-003.htm#en_us_publink1000219037

Example 1.(p6)

On November 22 of last year, you purchased a dishwasher for your rental property. The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Because the dishwasher was not ready for use last year, it is not considered placed in service until this year.
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.
taxmap/pubs/p527-003.htm#en_us_publink1000219038

Example 2.(p6)

On April 6, you purchased a house to use as residential rental property. You made extensive repairs to the house and had it ready for rent on July 5. You began to advertise the house for rent in July and actually rented it beginning September 1. The house is considered placed in service in July when it was ready and available for rent. You can begin to depreciate the house in July.
taxmap/pubs/p527-003.htm#en_us_publink1000219039

Example 3.(p6)

You moved from your home in July. During August and September you made several repairs to the house. On October 1, you listed the property for rent with a real estate company, which rented it on December 1. The property is considered placed in service on October 1, the date when it was available for rent.
taxmap/pubs/p527-003.htm#en_us_publink1000219040

Conversion to business use.(p6)

rule
If you place property in service in a personal activity, you cannot claim depreciation. 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. You place the property in service for business or income-producing use on the date of the change.
taxmap/pubs/p527-003.htm#en_us_publink1000219041

Example.(p6)

You bought a house 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 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 at that time its use changed to the production of income.
taxmap/pubs/p527-003.htm#en_us_publink1000219042

Idle Property(p6)

rule
Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). 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.
taxmap/pubs/p527-003.htm#en_us_publink1000219043

Cost or Other Basis Fully Recovered(p6)

rule
You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. See Basis of Depreciable Property, later.
taxmap/pubs/p527-003.htm#en_us_publink1000219044

Retired From Service(p6)

rule
You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or 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.
taxmap/pubs/p527-003.htm#en_us_publink1000219045

Depreciation Methods(p6)

rule
Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986.
If you placed rental property in service before 1987, you are using one of the following methods.See MACRS Depreciation, later, for more information.
taxmap/pubs/p527-003.htm#en_us_publink1000219046

Rental property placed in service before 2015.(p7)

rule
Continue to use the same method of figuring depreciation that you used in the past.
taxmap/pubs/p527-003.htm#en_us_publink1000219047

Use of real property changed.(p7)

rule
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. This includes your residence that you changed to rental use. See Property Owned or Used in 1986 in Pub. 946, chapter 1, for those situations in which MACRS is not allowed.
taxmap/pubs/p527-003.htm#en_us_publink1000219048

Improvements made after 1986.(p7)

rule
Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. 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. For more information about improvements, see Additions or improvements to property, later in this chapter under Recovery Periods Under GDS.
EIC
This publication discusses MACRS depreciation only. If you need information about depreciating property placed in service before 1987, see Pub. 534.
taxmap/pubs/p527-003.htm#en_us_publink1000219050

Basis of Depreciable Property(p7)

rule
The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. 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.
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.
Basis and adjusted basis are explained in the following discussions.
EIC
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. See Basis of Property Changed to Rental Use in chapter 4.
taxmap/pubs/p527-003.htm#en_us_publink1000219052

Cost Basis(p7)

rule
The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Your cost also includes amounts you pay for: