Tax Tips on Depreciation for Homeowners
A depreciation tax deduction can be claimed only on homes that are in use for profit from a business. It means a deduction on normal wear and tear of your home over a period of years. While a deduction is helpful during tax time, you must make sure you are using the appropriate recovery system. The method of depreciation has different calculation systems depending on the purchase date of your property.
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Qualifications on Property
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Only property you own fits within the qualifications for depreciation deductions. The property must be a part of something producing income for you, such as a business. Additionally, the property must have a useful life span of at least one year. This is also applicable if you are leasing out your property to someone else and he pays for upkeep.
Cost Basis for Property
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A determination of basis in property is the first method toward figuring your depreciation deduction. Basis is the cost of your property. Some examples include rent, mortgage premiums and loan fees. Add more to the cost of your property if it has had improvements or repairs since the property was put into use. This is called adjusted basis.
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Modified Accelerated Cost Recovery System
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Known as MACRS, the Modified Accelerated Cost Recovery System is the cost recovery method for calculating your depreciation deduction. Use MACRS only if your property was put into use after 1986. The General Depreciation System is the common calculation method for rental use of your home. Residential rental property has deductions using a 27-year cost recovery system. It’s a five-year system for office machinery, and a seven-year system for office furniture and equipment.
Alternate Depreciation System & ACRS
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The Alternate Depreciation System (ADS) is an alternate, second part of MACRS. Use this system in depreciating items falling under one class of property. Residential rental property goes by a 40-year depreciation system here. Use a six-year depreciation system for office machinery, and a 10-year system for office equipment. The Accelerated Cost Recovery System is for depreciation of all property put in use before 1987. Recovery periods available include a three-year period for vehicles and a five-year period for computers and other office equipment.
Form 4562
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For calculation of your depreciation, use form 4562 from the Internal Revenue Service. This is called “Depreciation and Amortization” and it has six parts. In Part I, list all expenses on your property. Part II is for any special depreciation allowance. Place your MACRS depreciation in Part III. For Part IV, provide a summary of all of the above. Then, for Parts V and VI, list all of your property and any amortization.
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