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IRS.gov Website
Publication 534
taxmap/pubs/p534-004.htm#en_us_publink100043640

Dispositions(p6)

rule
A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction.
You generally recognize gain or loss on the disposition of an asset by sale. However, nonrecognition rules can allow you to postpone some gain. See Pub. 544.
If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition.
taxmap/pubs/p534-004.htm#en_us_publink100043641

Early dispositions.(p6)

rule
The disposal of an asset before the end of its specified recovery period is referred to as an early disposition. When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved.
taxmap/pubs/p534-004.htm#en_us_publink100043746
Early dispositions of ACRS property other than 15-, 18-, or 19-year real property.(p6)
Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property.
taxmap/pubs/p534-004.htm#en_us_publink100043643
Dispositions — mass asset accounts.(p6)
The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. Examples of mass assets include minor items of office, plant, and store furniture and fixtures.
Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. You leave the unadjusted basis of the property in the account until recovered in future years. If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition.
taxmap/pubs/p534-004.htm#en_us_publink100043644
Early dispositions — 15-year real property.(p6)
If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. You use a full-month convention. For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. This applies whether you use the regular ACRS method or elected the alternate ACRS method.
taxmap/pubs/p534-004.htm#en_us_publink100043645

Example.(p6)

You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). You file your return based on a calendar year. Your rate from Table 1 for the third month is 10%. Your ACRS deduction for 1984 was $9,800 ($98,000 × 10%). For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% × $98,000. For 1989 through 1992, you figured your ACRS deductions using 6% for each year. The deduction each year was $98,000 × 6%. For 1993 and 1994, the ACRS deduction is ($98,000 × 5%) $4,900 for each year. You sell the house on June 1, 1995.
You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. The full ACRS deduction for 1995 is $4,900 ($98,000 × 5%). You then prorate this amount to the 5 months in 1995 during which it was rented. Your ACRS deduction for 1995 is $2,042 ($4,900 × 5/12).
taxmap/pubs/p534-004.htm#en_us_publink100043646
Early dispositions — 18- and 19-year real property.(p6)
If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. Under the mid-month convention, treat real property disposed of any time during a month as disposed of in the middle of that month. Count the month of disposition as half a month of use.
taxmap/pubs/p534-004.htm#en_us_publink100043647

Example. (p6)

You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). You file your return based on a calendar year. Your rate from Table 4 for the seventh month is 4%. You figured your ACRS deduction for 1984 was $4,000 ($100,000 × 4%). In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% × $100,000. You sell the house on September 24, 1995. Figure your ACRS deduction for 1995 for the months of use. The full ACRS deduction for 1995 is $5,000 ($100,000 × 5%). Prorate this amount for the 8.5 months in 1995 that you held the property. Under the mid-month convention, you count September as half a month. Your ACRS deduction for 1995 is $3,542 ($5,000 × 8.5/12).
taxmap/pubs/p534-004.htm#en_us_publink100043648

Depreciation Recapture(p6)

rule
If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Section 1245 property generally includes all personal property. See Section 1245 property in chapter 3 of Pub. 544 for more information.
You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Section 1250 property includes most real property. See Section 1250 property in chapter 3 of Pub. 544 for more information. This rule applies to all section 1250 real property except the following property.
  1. Any 15-, 18-, or 19-year real property that is residential rental property.
  2. Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method.
  3. Any 15-, 18-, or 19-year real property that is subsidized low-income housing.
For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation.
See Pub. 544 for further discussion of dispositions of section 1245 and 1250 property.