 Income tax 2021-2022 depreciation of rental property part number five. Get ready to get refunds to the max diving in the income tax 2021-2022. Most of this information can be found in publication 527 residential rental property tax year 2021 IRS website irs.gov irs.gov income tax formula focused on line one income. We would have a sub schedule basically an income statement with income and expenses expenses basically being deductions. The net then what rolls in to line one income of the income tax formula as well as eventually page one of the form 1040. This is the schedule e basically the income statement schedule the supplemental income and loss were focused on the rental real estate. So we're continuing our discussion of depreciation which for taxes includes the makers depreciation system under makers property that you place in service during 2021 in your rental activity generally falls into one of the following classes. So remember when we're thinking about depreciation for the tax code they're going to be very restrictive and defining in terms of what type of property we have and then what class it's going to fall into. And that will help us to determine the type of depreciation that we're allowed to apply to it. In other words under the depreciation classes were usually using some kind of depreciation methods similar to a double declining half year depreciation method over some life that is going to be term determined by you know the tax code. So we've got the five year property five year property this class includes computers and peripheral equipment office machine typewriters for example that's an older that's an older example. Where do I put my typewriter on when I purchase anyway calculators copiers automobiles and light trucks. This class also include appliances carpeting and furniture used in a residential rental real estate activity depreciation is limited on automobiles and other property used for transportation and property of a type generally used for entertainment or recreation or a music. You can see chapter five of publication 946 for more information there. Obviously they're a little bit. The iris is a little bit more skeptical of something like an automobile because it could be used for personal and business use and people could clearly be purchasing stuff not just for utilitarian reasons for their business or drive around some super fancy automobiles. They put kind of limits on them for that. And you can see a similar kind of rationale for things for entertainment and recreation and that kind of stuff. Seven year property this class includes office furniture and equipment desks file cabinets and similar types of items. You know the desk where you put your typewriter on top of it. You put your typewriter on the desk typewriters five year desk seven year. So this class also includes any property that doesn't have a class life and that hasn't been designated by law as being in any other class. So it's kind of like the default catch all class the seven year prop seven year property 15 year property. This class includes roads fences and shrubbery if depreciable. Remember that shrubbery might be part of landscaping which case would be part of land. But if depreciable we're talking 15 year property. Then we've got the residential rental property. So we've got like the real estate now which we've got to break out into residential and non residential because they're different for the tax code. So this class includes any real property that is a rental building or structure including a mobile home for which 80% or more of the gross rental income for the tax year is from dwelling units. It doesn't include a unit in a hotel motel in or other establishment where more than half of the units are used on a transient basis. If you live in any part of the building or structure the gross rental income includes the fair rental value of the part you live in. Caution the other property classes generally don't apply to property used in rental activities. These classes aren't discussed in this publication. Therefore if you want to check them out you can see publication 946 you can find the IRS website for more information there. So we got the makers recovery periods for property used in rental activities. So here's our chart that we have up top the makers recovery period the general depreciation system the alternative depreciation system. So once again we got the computers and their peripheral equipment the five years. We've got the office machinery such as that good old typewriter the calculators and the copiers five years the alternative is six years. We've got the automobiles at the five years the light trucks at the five years the appliances such as stoves and refrigerators five years the alternative at the nine years the carpets at the five years the furniture used in rental property at the five years office furniture those desks and the seven years any property that doesn't have a class life and that hasn't been designated by law so it's that catch all plays the roads shrubbery fences generally the 15 years residential rental property and structural components such as fences water pipes venting that's at the 27.5 years when you're thinking about the property then 27.5 pretty long of course timeframe on it which means you got it if you have to capitalize it you're going to get the benefit of the expensing of it over fairly long threshold and that's why of course if we can basically expense it in some other way instead of capitalizing it that would generally be beneficial if we can categorize something not as the residential rental property or possibly categorize it as some other area like carpeting or something like that that would typically be beneficial because we would have a smaller or shorter timeframe on which to allocate the expenses meaning we get the benefit of them sooner so from a tax planning standpoint that's kind of our mindset or where we're angling or where we're thinking from so recovery periods under the GDS the recovery period of property is the number of years over which you recover its cost or other bases the recovery periods are generally longer under a DS then the G then GDS the recovery period of property depends on its property class under GDS the recovery period of an asset is generally the same as its property class class lies in recovery periods for most assets are listed in appendix B of publication 946 and then we got C table to one for recovery periods of property commonly used in residential rental activities. Qualified Indian reservation properties so this is of course a specialized kind of area shorter recovery periods are provided under makers for qualified Indian reservation property placed in service on Indian reservations that would typically be a benefit for the shorter periods because then you get the benefit sooner typically so for more information there you can see publication 946 additions or improvements to property treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes so you already got the property in place you're putting an addition in your first thought would be well do I have to capitalize it or do I have to put it on the books can I expense it or do I have to capitalize it if you have to capitalize it it would be in the form of improvements at that point in time you've already got the rental place on the books and you're in the process of renting we are imagining and we're going to treat additions or improvements you make to your depreciation rental property as a separate property item for depreciation purposes so we're not going to like alter the depreciation of the current rental rental property at that point the property class and recovery period of the addition or improvement are the ones that would apply to the original property if you had placed it in service at the same time as the addition or improvement so the recovery period for and for an addition or improvement to property begins on the latter of the date the addition or improvement is placed in service or the date the property to which the addition or improvement was made is placed in service examples you own a residential rental house that you have been renting since 1986 and depreciating under the ACRS you built an addition onto the house and placed it in service in 2021 you must use the makers for the addition because that's where you were at at this point under a GDS the addition is depreciated as residential rental property over 27.5 years so conventions a convention is a method established under makers to set the beginning and end of the recovery period so this is where the half year convention or mid month convention and this kind of conventions will come into play with makers in other words you make kind of an assumption of when you bought it instead of saying yeah I bought it on March 3rd or something like that so I have to have a fraction of the year how are you going to figure that fraction of the year is it going to be by date by hour by month by you know or you're going to estimate it at the middle of the year or in the middle of the quarter or something like that so the convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year of dispose of the property so we've got that mid month convention so that assumes whatever month if you bought it on March 3rd assuming the middle of the month like the 15th is like the middle right of that month pretty even though there's an odd number of days or something so in case a mid month convention is used for all residential rental property and non residential rental property under this convention you treat all property placed in service or disposed of during any month as placed in service or disposed of at the midpoint of the month so whenever you bought it you're going to say it's the middle of the month you bought it on March 3rd middle of the month of 15th let's say if you bought it on March 28th it'd be the middle of the month if you bought it on September 5th it would be September 15th the middle of the month is what we're assuming that's the convention so then we got the mid quarter convention another convention you can imagine being put into place a mid quarter convention must be used at the mid month convention doesn't apply and the total depreciation basis of makers property placed in service in the last three months of a tax year excluding non residential rental property residential rental property and property placed in service and disposed of in the same year is more than 40% of the total basis of all such property placed in service during the year so a mid quarter convention would be we're going to assume it was purchased in the middle of the quarter now note if you if you're talking about rent residential or rental property you might have that mid month convention because they're going to try to make that a little bit more specific if you've got other depreciable property like equipment and whatnot they might use a mid year convention because that would be like an easier thing to do you just assume you bought it in the middle of the year but that incentivizes people to try to buy a bunch of stuff at the end of the year so they can get a whole six months of depreciation even though they bought it all in December 31st or something like that so then they say well if that happens and you bought too much at the end of the year and you're trying to cheat us when you're trying to take it too much of advantage of the mid year convention then you might have to default to a mid quarter convention and that instance tax software is helpful to figure that kind of stuff out so under this convention you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of the quarter for example during the tax year Tom purchased the following items to use in his rental property he elects not to claim this the special depreciation allowance discussed earlier a dishwasher for $400 that he placed in service in January used furniture 100 that he placed in service in September a refrigerator for 6800 that he placed in service in October Tom uses the calendar year as his tax year the total basis of all property placed in service that year is $1300 the 800 basis of the refrigerator placed in service during the three months of his tax year exceeds 500 exceeds 520 40% of the 1300 so the refrigerator the basis of the refrigerator which he bought in the last quarter is going over the threshold so Tom must use the mid quarter convention instead of the half year convention for all three items so you see the general idea here so usually we'd say OK you bought all three of these items whenever you bought them we will use a half year convention convention and just assume for all of them you bought them in the middle of the year but because you bought a lot at the end of the year in relation to the other items then we're going to have a more stringent requirement and require a mid quarter convention on it so because because if you if and this one's not a very extreme example right but you can imagine people trying to buy a lot of stuff at the end of the year to basically take advantage of the mid year convention getting 6 months of depreciation even though they bought it at the end of the year so half year convention the half year convention is used if neither the mid quarter convention nor the mid month convention applies so under this convention you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of that tax year and it sounds like this one would be the least used or something like that the way we kind of listed here the mid month before the half year but the half year is kind of like the default unless unless something was purchased like at the end of the quarter so that last rule that we saw applied and then we would have to use the quarter the mid quarter convention and then real estate for example large things like real estate would generally be using that mid month convention just because of the significance of the large dollar amounts that would be applied there you would think that would be the rationale of the tax code so if this convention applies you deduct a half year of the depreciation for the first year and the last year that you depreciate the property you deduct a full year of depreciation for any other year during the recovery period figuring your depreciation deduction you can figure your maker's depreciation deduction in one of two ways the deduction is substantially the same for both ways you can figure the deduction using either the depreciation method and convention that applies over the recovery period of the property or the percentage from the maker's percentage tables so in this publication we will use the percentage tables for instructions on how to compute the deduction c chapter four publication nine four six so you can you know you can do the calculation like a maker's calculation is basically a double declining balance you can figure the double declining balance and then you could figure the mid year convention or the mid quarter convention or the mid month convention that way so you can do that and double see what's going on with it or you can use the tables that they give you which basically do that in table format