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Columns: Tax Talk
George Saenz, CPA Expert: George Saenz, CPA
Tax Talk
Using the straight-line MACRS method of depreciation
Tax Talk

Figuring rental property depreciation

Dear Tax Talk,
I have residential rental real property that I acquired on Feb. 12, 2004, and sold on Oct. 16, 2006. Using the straight-line MACRS method to depreciate the apartment building, how do I compute the depreciation for the last year that I owned the building? Do I need to calculate for the months that I actually owned the property, or do I use the MACRS table for the entire third year?
-- Henry

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Dear Henry,
Depreciation is a deduction that allows you to write off the cost of your investment in income-producing property. For tax purposes, depreciation is computed using the Modified Accelerated Cost Recovery System. Under MACRS, assets are assigned a class life depending on their nature.

Residential real estate that is not rental property is of course not depreciated, but residential rental real estate is considered 27.5-year property. This means that the cost of the property is depreciated over 27.5 years, which, expressed as a percentage, equals 3.636 percent of the cost a year.

Under MACRS all real property is depreciated on a straight-line basis over its class life. Straight line means that the depreciation is basically computed by dividing the cost by the number of years of its class life.

However since MACRS is a system, we have systematic rules that include depreciation conventions. Real property has a midmonth convention for the year of purchase and the year of sale. This means that you compute depreciation for the year of purchase and sale based on the number of full months in the year that you owned the property, plus a half month for the purchase and sale months.

In 2004 you owned the property for 10 full months (March through December) so you should get 10.5 months' depreciation for that year and 9.5 months for 2006. For 2006 your depreciation is 9.5/12 multiplied by 3.636 percent, which equals 2.879 percent. For 2004, your depreciation should have been 3.182 percent, and for 2005 it would have been 3.636 percent.

In total, your depreciation deductions add up to 9.697 percent of the cost of the property. This is the maximum amount of gain on the sale subject to Section 1250 recapture. Remember Section 1250 recapture is taxed at a higher rate than your long-term gain on the sale.

Bankrate.com's corrections policy-- Posted: May 17, 2007
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