Depreciation on
real property,
like an office building, begins in the month the building is placed in service.
This is called the mid-month convention. In most cases, when you buy a building, the purchase price
includes the cost of both the land and the building. Since land cannot be depreciated, you need to identify the
portion of the original purchase price that relates to land. You can use the property tax assessor's values to
compute a ratio of the value of the land to the building. The MACRS tables for mid-month convention are in
Publication 946, How to Depreciate Property.
Example:
Ryan bought an office building for $100,000. The property tax statement shows :
Improvements $60,000 75%
Land $20,000 25%
Total Value $80,000 100%
Multiply the purchase price ($100,000) by 25% to get a land value of $25,000. You can depreciate your $75,000
basis in the building using the mid-month MACRS tables.
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[15] Is there any exception to the general rule that costs of property must be depreciated?
This exception is called
Section 179 Deduction.
You can choose to take an immediate deduction for some
personal property that you would otherwise depreciate over several years. You must make this election in the
year that you placed the property in service using Form 4562, Depreciation and Amortization. You cannot
take this special deduction on property you've previously used personally and then converted to business use.
This deduction is limited to your wages and net business income. There is also a maximum dollar limit,
which changes from year to year. The maximum dollar limitation is printed on Form 4562 every year. If you
can't use all of the
Section 179 Deduction
because of the income limit, you can carry the unused deduction
over to the next tax year.
Example:
Mark purchased a piece of equipment for $30,000 in 1998. On his 1998 tax return he could choose to take an
additional
depreciation deduction up to $17,500. Mark’s total business net profit for 1998 was $12,000. His
additional
first year deduction would be limited to $12,000. If he elects the full $17,500, the unused $5,500
($17,500-$12,000) will be carried over to 1999.
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[16] Are there any limitations on the amount of depreciation I can claim in one year?
There are not any overall limitations on yearly depreciation. However, if an asset is considered
Listed
Property
, your annual deduction is limited. Listed property is a term for business assets that are often used
for personal purposes. Under the MACRS rules, depreciation is limited for listed property, such as:
• Vehicles that weigh 6,000 or less
• Other property used for transportation (pick-ups, airplanes, buses, boats, motorcycles, etc.)
• Property used for entertainment, recreation, or amusement (video recorders, stereo equipment,
photographic equipment, etc.)
• Computer and related equipment unless used at a regular place of business
• Cellular telephones
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[17] Can I claim depreciation on my business vehicle if I use the standard mileage rate?