Irs what is listed property

Under MACRS, these three conventions determine when property is placed in service: Half-year convention — In most cases, the half-year convention is used for personal property.

Under the mid-quarter convention: Property is considered placed in service at the midpoint of a quarter. This is true regardless of when it was actually placed in service during the quarter. This depends on which quarter of the year the property was placed in service. Section deduction Under Section , you can claim a deduction in the current year. Increased depreciation deduction Businesses located in these areas might qualify for an increased depreciation deduction: Enterprise zone placed in service before Jan.

Listed property includes: Passenger automobiles and other property used for transportation. To learn more, see Publication How to Depreciate Property at www. What Are the E-File Requirements? Common Tax Questions Roundup Here are the top tax questions our professionals got this year — with answers for you!

No matter how you file, Block has your back. File with a tax pro File online. Cancel Continue. The term listed property refers to a certain type of depreciable property that may be used primarily for business purposes. That means assets may be used for personal purposes for the remainder of the time. Listed property is subject to a special set of tax rules for the taxpayer. These assets also depreciate in value over time and can be used for personal purposes when not in use for the day-to-day operations of the business.

In simple terms, a company's listed property is any asset used for both business and personal purposes that loses value over time, as long as it is predominantly used to run the business.

The listed property rules were introduced as part of the United States tax code to keep people from claiming tax deductions for the personal use of property under the guise that it was used in a business or trade. For instance, companies are required to keep detailed records of all the assets they use as listed property. This includes the amount paid for each piece of property including the original cost, any repairs involved, insurance , and any other related expenses. Listed property—also referred to at times as mixed-use property—used primarily for business reasons is subject to the statutory percentage depreciation method, as it will be considered a business asset.

Listed property used for business only half the time at most—and passes the predominant use test—can still have depreciation based on the business use percentage claimed on it. In this case, though, it must be depreciated under the straight-line method. Cars used solely to carry passengers are also subject to additional depreciation limitations. Listed property that does not meet the predominant use test is not eligible for Section depreciation—the maximum amount of depreciation allowed—or other accelerated depreciation methods.

In other words, a tax-paying entity must substantiate the business use of a property if it is to depreciate this property or deduct expenses. The predominant use test must be applied to every item of listed property. That is, the taxpayer may have to pay back some of the excess depreciation claimed. The amount of depreciation recaptured is the accelerated depreciation allowed for the years preceding the recapture year, including any Section expense, minus the MACRS alternative depreciation system ADS depreciation amount that would have been allowed for the same period of time.

Here's a list of assets that generally qualify as listed property:. As of Jan. Cell phones were once included as a category of listed property. But changes were made to prevent taxpayers from abusing the system and to cut down on people claiming their personal communications devices as commercial-use equipment. As such, the Small Business Jobs Act removed cell phones and other similar personal telecommunications devices from the list of acceptable listed property as of Jan.

Cell phones and other devices, however, may still be claimed for tax years prior to This publication explains how you can recover the cost of business or income-producing property through deductions for depreciation for example, the special depreciation allowance and deductions under the Modified Accelerated Cost Recovery System MACRS.

It also explains how you can elect to take a section deduction, instead of depreciation deductions, for certain property and the additional rules for listed property. The depreciation methods discussed in this publication generally do not apply to property placed in service before For more information, see Pub.

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 discussion throughout the publication. The following table shows where you can get more detailed information when depreciating certain types of property. We welcome your comments about this publication and your suggestions for future editions.

You can send us comments through IRS. Or you can write to:. Do not send tax questions, tax returns, or payments to the above address. Visit IRS. Go to IRS. The IRS will process your order for forms and publications as soon as possible. Do not resubmit requests you've already sent us. You can get forms and publications faster online. 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 depreciating property and answers the following questions. See chapter 6 for information about getting publications and forms. You can depreciate most types of tangible property except land , such as buildings, machinery, vehicles, furniture, and equipment. You can also depreciate certain intangible property, such as patents, copyrights, and computer software.

To claim depreciation, you must usually be the owner of the property. You are considered as owning property even if it is subject to a debt. You made a down payment to purchase rental property and assumed the previous owner's mortgage. You own the property and you can depreciate it. 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.

You can depreciate leased property only if you retain the incidents of ownership in the property explained below. This means you bear the burden of exhaustion of the capital investment in the property. Therefore, if you lease property from someone to use in your trade or business or for the production of income, generally you cannot depreciate its cost because you do not retain the incidents of ownership.

You can, however, depreciate any capital improvements you make to the property. If you lease property to someone, you can generally 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.

The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. 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 Property , later. If you are a tenant—stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment.

Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows.

Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. Add to the amount figured in a any mortgage debt on the property on the date you bought the stock. Subtract from the amount figured in b any mortgage debt that is not for the depreciable real property, such as the part for the land.

Subtract from the amount figured in 1 any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant—stockholders. Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. Multiply the result of 2 by the percentage you figured 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.

You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. You use one half of your apartment solely for business purposes. If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. The basis of all the depreciable real property owned by the cooperative housing 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 considered 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. 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, see Pub. 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 taxable. You cannot depreciate property that you use solely for personal activities.

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 keep for listed property, such as a car, see What Records Must Be Kept?

Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met.

For information about qualified business use of listed property, see What Is the Business-Use Requirement? 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 depreciating your home office, see Pub. 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 treat certain property held in your business as depreciable property rather than as inventory.

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 careful examination of the facts in two similar situations results in different conclusions. Maple Corporation is in the business of leasing 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 intended 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. 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 1 year and meet the following requirements.

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? 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. To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service.

You maintain a library for use in your profession. 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 1 year or less, you cannot depreciate them. Instead, you deduct their cost as a business expense. You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up.

The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping 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. 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. Even if the requirements explained in the preceding discussions 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 Capitalization Rules in Pub.

Section intangibles. You must amortize these costs. Section intangibles are discussed in detail in chapter 8 of Pub. Intangible property, such as certain computer software, that is not section intangible property, can be depreciated if it meets certain requirements. See Intangible Property , later. You cannot depreciate a term interest in property created or acquired after July 27, , for any period during which the remainder interest is held, directly or indirectly, by a person related to you.

A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. For a description of related persons, see Related Persons , later. If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you must generally reduce your basis in the term interest by any depreciation or amortization not allowed.

If you hold the remainder interest, you must generally increase your basis in that interest by the depreciation not allowed to the term interest holder. However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. The term interest is held by a nonresident alien individual 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.

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 dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, , or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser.

You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity.

Even if you are not using the property, it is in service when it is ready and available for its specific use. 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.

On April 6, Sue Thorn bought a house to use as residential rental property. She made several repairs 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. 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 equipment 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.

If you place property in service in a personal activity, you cannot claim depreciation. 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 in the business or income-producing activity on the date of the change. 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 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-producing use at that time. 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 not in use.

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 stop depreciating property when you have fully recovered your cost or other basis. You fully recover your basis when your section deduction, allowed or allowable depreciation deductions, and salvage value, if applicable, equal the cost or investment in the property.

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.

MACRS is discussed in chapter 4. Property placed in service before must be depreciated under the methods discussed in Pub. For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. You must generally use MACRS to depreciate real property that you acquired for personal use before and changed to business or income-producing use after You must treat an improvement made after to property you placed in service before as separate depreciable property.

You may not be able to use MACRS for property you acquired and placed in service after if any of the situations described below apply. For the following discussions, do not treat property as owned before you placed it in service. If you owned property in but did not place it in service until , you do not treat it as owned in You acquired the property from a person who owned it in and as part of the transaction the user of the property did not change. You lease the property to a person or someone related to this person who owned or used the property in The property was not MACRS property in the hands of the person from whom you acquired it because of 2 or 3 above.

You generally cannot use MACRS for real property section property in any of the following situations. You lease the property to a person who owned the property in or someone related to that person. You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up.

It does not apply to the carried-over part of the basis. Property that was MACRS property in the hands of the person from whom you acquired it because of 2 above. An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant.

The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. A tax-exempt educational or charitable organization and any person or, if that person is an individual, a member of that person's family who directly or indirectly controls the organization. A corporation and a partnership if the same persons own both of the following.

The related person and a person who is engaged in trades or businesses under common control. See section 52 a and 52 b of the Internal Revenue Code. You must determine whether you are related to another person at the time you acquire the property.

A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination.

Constructive ownership of stock or partnership interest. To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.

An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. An individual who owns, except by applying rule 2 , any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner.

For purposes of rule 1 , 2 , or 3 , stock or a partnership interest considered to be owned by a person under rule 1 is treated as actually owned by that person. However, stock or a partnership interest considered to be owned by an individual under rule 2 or 3 is not treated as owned by that individual for reapplying either rule 2 or 3 to make another person considered to be the owner of the same stock or partnership interest.

Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. However, you can choose to depreciate certain intangible property under the income forecast method discussed later. You cannot depreciate intangible property that is a section intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated.

This method lets you deduct the same amount of depreciation each year over the useful life of the property. To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Subtract the salvage value, if any, from the adjusted basis. The balance is the total depreciation you can take over the useful life of the property. Divide the balance by the number of years in the useful life.

This gives you your yearly depreciation deduction. Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property.

If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. He depreciates the patent under the straight line method, using a year useful life and no salvage value.

If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it.

However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. Computer software is generally a section intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. However, computer software is not a section intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests.

If the software meets the tests above, it may also qualify for the section deduction and the special depreciation allowance, discussed later in chapters 2 and 3.

If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. You can amortize certain intangibles created on or after December 31, , over a year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs.

Any intangible asset that has a useful life that can be estimated with reasonable accuracy. Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions.

You must also increase the year safe harbor amortization period to a year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities.

You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th tax year following the tax year the property is placed in service.

For more information, see section g of the Internal Revenue Code. For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. You can depreciate this property using either the straight line method or the income forecast method. You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. The participations and residuals must relate to income to be derived from the property before the end of the 10th tax year after the property is placed in service.

For this purpose, participations and residuals are defined as costs, which by contract vary with the amount of income earned in connection with the property. Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the tax year that they are paid. If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. If the videocassette has a useful life of 1 year or less, you can currently deduct the cost as a business expense.

MACRS does not apply to property used before and transferred after to a corporation or partnership except property the transferor placed in service after July 31, , if MACRS was elected to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis.

If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS.

You make the election by reporting your depreciation for the property on line 15 in Part II of Form and attaching a statement as described in the Instructions for Form You must make this election by the return due date including extensions for the tax year you place your property in service.

However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return excluding extensions. Attach the election to the amended return and write "Filed pursuant to section File the amended return at the same address you filed the original return. If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS.

See Pub. To figure your depreciation deduction, you must determine the basis of your property. To determine basis, you need to know the cost or other basis of your property. The basis of property you buy is its cost plus amounts you paid for items such as sales tax see Exception below , freight charges, and installation and testing fees.

The cost includes the amount you pay in cash, debt obligations, other property, or services. You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A Form If you make that choice, you cannot include those sales taxes as part of your cost basis.

If you buy property and assume or buy subject to an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. The basis of real property also includes certain fees and charges you pay in addition to the purchase price. These are generally shown on your settlement statement and include the following.

Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. For fees and charges you cannot include in the basis of property, see Real Property in Pub. If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property.

For information about the uniform capitalization rules, see Pub. Other basis usually refers to basis that is determined by the way you received the property. For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance.

If you acquired property in this or some other way, see Pub. If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. The fair market value FMV of the property on the date of the change in use.

Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation.

Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account.

To find your property's basis for depreciation, you may have to make certain adjustments increases and decreases to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. These events could include the following.

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. For more information, see What Is the Basis for Depreciation? You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation you actually deducted from which you received a tax benefit.

Depreciation allowable is depreciation you are entitled to deduct. If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit the depreciation allowed.

If you improve depreciable property, you must treat the improvement as separate depreciable property.