PH10ky412

PH10ky412 - CHAPTER 10 COST RECOVERY (DEPRECIATION) Realty...

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Unformatted text preview: CHAPTER 10 COST RECOVERY (DEPRECIATION) Realty - Land and anything permanently attached to land. Personalty - All other tangible property. I. GENERAL RULES - A. Eligible property - 1. Property must be used in a trade or business or held for the production of income. a. When a single asset is used for both profit seeking purposes and personal purposes, only the portion attributable to business or income producing activities may be depreciated (e.g., a car used 80 percent for business and 20 percent for personal; a duplex when the taxpayer lives in one unit and rents the other). b. When an asset is converted from personal to income producing use, the basis for depreciation is the lesser of the asset's FMV or adjusted basis at the time of conversion. 2. Property that has no determinable life may not be depreciated or amortized (e.g., land). B. Depreciation methods (Post 1986) - 1. MACRS - Property depreciated under a method that is not expressed in terms of years may not use MACRS. 2. MACRS straight line - optional method in place of MACRS. 3. ADS - 150% declining balance--required for alternative minimum tax purposes. 4. ADS straight line -optional method in place of MACRS. Recovery periods are longer than MACRS recovery periods. Property Class MACRS MACRS S.L. ADS S. L. Half-year Mid-quarter Table 1, pg. C-2 Tables 2-5, pg. C-3 to 6 Manually Manually 3 5 7 10 15 20 __ ________ Mid-month Tables 7-9, pg. C-7 to 9 Manually 27.5 31.5 39 * ________ * For property placed in service after May 12, 1993. II. ACCOUNTING CONVENTIONS - A. MACRS - 1. Half-year convention - Example--Taxpayer purchased an asset with a 3 year recovery life which cost $9000. 2. Mid-quarter convention - If > 40% of all qualifying property (3-20 year property) is placed in service during the last quarter of the year. 3. Mid month convention - Residential and nonresidential realty. If property is used for both residential and nonresidential purposes, the property is classified as residential if > 80% of gross rents are from the residential portion. Example--An office building was placed in service on March 10, 2011. The purchase price was $1,500,000. 4. The half-year, mid-quarter, and mid-month conventions also apply to the year of disposal. Example--A $10,000 car was purchased on 1/1/x1 and sold on 4/3/x3. This was the only purchase made during the year. Assume the car was purchased on 4/10/x1. Assume the car was purchased on 11/1/x1. Residential Realty - Purchased on 11/1/x1 for $1,000,000, sold on 7/16/x3. B. MACRS straight line - 1. Use the same recovery life as for regular MACRS. 2. The election to use straight line is made annually by class. Example--Five-year property was placed in service on 1/1/x1 and sold on 4/3/x3. The purchase price was $10,000. This was the only purchase made during the year....
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PH10ky412 - CHAPTER 10 COST RECOVERY (DEPRECIATION) Realty...

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