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Nm Taxation And Revenue

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Nm Taxation And Revenue

Nm taxation and revenue 2. Nm taxation and revenue   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. Nm taxation and revenue You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Nm taxation and revenue Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Nm taxation and revenue You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Nm taxation and revenue You can deduct depreciation only on the part of your property used for rental purposes. Nm taxation and revenue Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Nm taxation and revenue You may have to use Form 4562 to figure and report your depreciation. Nm taxation and revenue See Which Forms To Use in chapter 3. Nm taxation and revenue Also see Publication 946. Nm taxation and revenue Section 179 deduction. Nm taxation and revenue   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. Nm taxation and revenue This deduction is not allowed for property used in connection with residential rental property. Nm taxation and revenue See chapter 2 of Publication 946. Nm taxation and revenue Alternative minimum tax (AMT). Nm taxation and revenue   If you use accelerated depreciation, you may be subject to the AMT. Nm taxation and revenue Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Nm taxation and revenue   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Nm taxation and revenue However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Nm taxation and revenue   To find out if you are subject to the AMT, see the Instructions for Form 6251. Nm taxation and revenue The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. Nm taxation and revenue What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Nm taxation and revenue You own the property. Nm taxation and revenue You use the property in your business or income-producing activity (such as rental property). Nm taxation and revenue The property has a determinable useful life. Nm taxation and revenue The property is expected to last more than one year. Nm taxation and revenue Property you own. Nm taxation and revenue   To claim depreciation, you usually must be the owner of the property. Nm taxation and revenue You are considered as owning property even if it is subject to a debt. Nm taxation and revenue Rented property. Nm taxation and revenue   Generally, if you pay rent for property, you cannot depreciate that property. Nm taxation and revenue Usually, only the owner can depreciate it. Nm taxation and revenue However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Nm taxation and revenue See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Nm taxation and revenue Cooperative apartments. Nm taxation and revenue   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. Nm taxation and revenue See chapter 4, Special Situations. Nm taxation and revenue Property having a determinable useful life. Nm taxation and revenue   To be depreciable, your property must have a determinable useful life. Nm taxation and revenue This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Nm taxation and revenue What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Nm taxation and revenue This includes land and certain excepted property. Nm taxation and revenue Land. Nm taxation and revenue   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Nm taxation and revenue But if it does, the loss is accounted for upon disposition. Nm taxation and revenue The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Nm taxation and revenue   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Nm taxation and revenue 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. Nm taxation and revenue Example. Nm taxation and revenue You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Nm taxation and revenue Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Nm taxation and revenue If you replace the house, you would have to destroy the bushes and trees right next to it. Nm taxation and revenue These bushes and trees are closely associated with the house, so they have a determinable useful life. Nm taxation and revenue Therefore, you can depreciate them. Nm taxation and revenue Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Nm taxation and revenue Excepted property. Nm taxation and revenue   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Nm taxation and revenue Property placed in service and disposed of (or taken out of business use) in the same year. Nm taxation and revenue Equipment used to build capital improvements. Nm taxation and revenue You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Nm taxation and revenue For more information, see chapter 1 of Publication 946. Nm taxation and revenue When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Nm taxation and revenue You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. Nm taxation and revenue Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. Nm taxation and revenue Even if you are not using the property, it is in service when it is ready and available for its specific use. Nm taxation and revenue Example 1. Nm taxation and revenue On November 22 of last year, you purchased a dishwasher for your rental property. Nm taxation and revenue The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Nm taxation and revenue Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Nm taxation and revenue If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. Nm taxation and revenue Example 2. Nm taxation and revenue On April 6, you purchased a house to use as residential rental property. Nm taxation and revenue You made extensive repairs to the house and had it ready for rent on July 5. Nm taxation and revenue You began to advertise the house for rent in July and actually rented it beginning September 1. Nm taxation and revenue The house is considered placed in service in July when it was ready and available for rent. Nm taxation and revenue You can begin to depreciate the house in July. Nm taxation and revenue Example 3. Nm taxation and revenue You moved from your home in July. Nm taxation and revenue During August and September you made several repairs to the house. Nm taxation and revenue On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Nm taxation and revenue The property is considered placed in service on October 1, the date when it was available for rent. Nm taxation and revenue Conversion to business use. Nm taxation and revenue   If you place property in service in a personal activity, you cannot claim depreciation. Nm taxation and revenue However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. Nm taxation and revenue You place the property in service for business or income-producing use on the date of the change. Nm taxation and revenue Example. Nm taxation and revenue You bought a house and used it as your personal home several years before you converted it to rental property. Nm taxation and revenue 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. Nm taxation and revenue You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. Nm taxation and revenue Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). Nm taxation and revenue For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. Nm taxation and revenue Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. Nm taxation and revenue For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Nm taxation and revenue See Basis of Depreciable Property , later. Nm taxation and revenue Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Nm taxation and revenue 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. Nm taxation and revenue You sell or exchange the property. Nm taxation and revenue You convert the property to personal use. Nm taxation and revenue You abandon the property. Nm taxation and revenue The property is destroyed. Nm taxation and revenue Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Nm taxation and revenue If you placed rental property in service before 1987, you are using one of the following methods. Nm taxation and revenue ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Nm taxation and revenue Straight line or declining balance method over the useful life of property placed in service before 1981. Nm taxation and revenue See MACRS Depreciation , later, for more information. Nm taxation and revenue Rental property placed in service before 2013. Nm taxation and revenue   Continue to use the same method of figuring depreciation that you used in the past. Nm taxation and revenue Use of real property changed. Nm taxation and revenue   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Nm taxation and revenue This includes your residence that you changed to rental use. Nm taxation and revenue See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Nm taxation and revenue Improvements made after 1986. Nm taxation and revenue   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Nm taxation and revenue As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Nm taxation and revenue For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Nm taxation and revenue This publication discusses MACRS depreciation only. Nm taxation and revenue If you need information about depreciating property placed in service before 1987, see Publication 534. Nm taxation and revenue Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. Nm taxation and revenue This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. Nm taxation and revenue 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. Nm taxation and revenue Basis and adjusted basis are explained in the following discussions. Nm taxation and revenue If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. Nm taxation and revenue See Basis of Property Changed to Rental Use in chapter 4. Nm taxation and revenue Cost Basis The basis of property you buy is usually its cost. Nm taxation and revenue The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Nm taxation and revenue Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. Nm taxation and revenue Exception. Nm taxation and revenue   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. Nm taxation and revenue Such taxes were deductible before 1987 and after 2003. Nm taxation and revenue Loans with low or no interest. Nm taxation and revenue   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. Nm taxation and revenue See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Nm taxation and revenue Real property. Nm taxation and revenue   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. Nm taxation and revenue Real estate taxes. Nm taxation and revenue   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. Nm taxation and revenue You cannot deduct them as taxes paid. Nm taxation and revenue   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Nm taxation and revenue Do not include that amount in your basis in the property. Nm taxation and revenue Settlement fees and other costs. Nm taxation and revenue   The following settlement fees and closing costs for buying the property are part of your basis in the property. Nm taxation and revenue Abstract fees. Nm taxation and revenue Charges for installing utility services. Nm taxation and revenue Legal fees. Nm taxation and revenue Recording fees. Nm taxation and revenue Surveys. Nm taxation and revenue Transfer taxes. Nm taxation and revenue Title insurance. Nm taxation and revenue Any 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. Nm taxation and revenue   The following are settlement fees and closing costs you cannot include in your basis in the property. Nm taxation and revenue Fire insurance premiums. Nm taxation and revenue Rent or other charges relating to occupancy of the property before closing. Nm taxation and revenue Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. Nm taxation and revenue   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Nm taxation and revenue Assumption of a mortgage. Nm taxation and revenue   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. Nm taxation and revenue Example. Nm taxation and revenue You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Nm taxation and revenue Your basis is $300,000. Nm taxation and revenue Separating cost of land and buildings. Nm taxation and revenue   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. Nm taxation and revenue The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. Nm taxation and revenue   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. Nm taxation and revenue Example. Nm taxation and revenue You buy a house and land for $200,000. Nm taxation and revenue The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Nm taxation and revenue The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. Nm taxation and revenue You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. Nm taxation and revenue Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). Nm taxation and revenue Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. Nm taxation and revenue If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Nm taxation and revenue Adjusted Basis To figure 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 for business or the production of income. Nm taxation and revenue The result of these adjustments to the basis is the adjusted basis. Nm taxation and revenue Increases to basis. Nm taxation and revenue   You must increase the basis of any property by the cost of all items properly added to a capital account. Nm taxation and revenue These include the following. Nm taxation and revenue The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. Nm taxation and revenue Amounts spent after a casualty to restore the damaged property. Nm taxation and revenue The cost of extending utility service lines to the property. Nm taxation and revenue Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Nm taxation and revenue Additions or improvements. Nm taxation and revenue   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. Nm taxation and revenue This includes all direct costs, such as material and labor, but does not include your own labor. Nm taxation and revenue It also includes all expenses related to the addition or improvement. Nm taxation and revenue   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. Nm taxation and revenue Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Nm taxation and revenue   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Nm taxation and revenue For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Nm taxation and revenue    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Nm taxation and revenue However, see What Rental Property Cannot Be Depreciated, earlier. Nm taxation and revenue Assessments for local improvements. Nm taxation and revenue   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. Nm taxation and revenue For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. Nm taxation and revenue Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Nm taxation and revenue You cannot deduct these items as taxes or depreciate them. Nm taxation and revenue    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Nm taxation and revenue Do not add them to your basis in the property. Nm taxation and revenue Deducting vs. Nm taxation and revenue capitalizing costs. Nm taxation and revenue   Do not add to your basis costs you can deduct as current expenses. Nm taxation and revenue However, there are certain costs you can choose either to deduct or to capitalize. Nm taxation and revenue If you capitalize these costs, include them in your basis. Nm taxation and revenue If you deduct them, do not include them in your basis. Nm taxation and revenue   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Nm taxation and revenue   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Nm taxation and revenue Decreases to basis. Nm taxation and revenue   You must decrease the basis of your property by any items that represent a return of your cost. Nm taxation and revenue These include the following. Nm taxation and revenue Insurance or other payment you receive as the result of a casualty or theft loss. Nm taxation and revenue Casualty loss not covered by insurance for which you took a deduction. Nm taxation and revenue Amount(s) you receive for granting an easement. Nm taxation and revenue Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. Nm taxation and revenue Exclusion from income of subsidies for energy conservation measures. Nm taxation and revenue Special depreciation allowance claimed on qualified property. Nm taxation and revenue Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Nm taxation and revenue If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Nm taxation and revenue   If your rental property was previously used as your main home, you must also decrease the basis by the following. Nm taxation and revenue Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Nm taxation and revenue District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Nm taxation and revenue Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Nm taxation and revenue Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Nm taxation and revenue This allowance is figured before you figure your regular depreciation deduction. Nm taxation and revenue See Publication 946, chapter 3, for details. Nm taxation and revenue Also see the Instructions for Form 4562, Line 14. Nm taxation and revenue If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Nm taxation and revenue The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Nm taxation and revenue MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Nm taxation and revenue This section explains how to determine which MACRS depreciation system applies to your property. Nm taxation and revenue It also discusses other information you need to know before you can figure depreciation under MACRS. Nm taxation and revenue This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Nm taxation and revenue Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Nm taxation and revenue You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Nm taxation and revenue Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. Nm taxation and revenue In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. Nm taxation and revenue However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. Nm taxation and revenue For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Nm taxation and revenue Electing ADS If you choose, you can use the ADS method for most property. Nm taxation and revenue Under ADS, you use the straight line method of depreciation. Nm taxation and revenue The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. Nm taxation and revenue However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Nm taxation and revenue If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. Nm taxation and revenue Once you make this election, you can never revoke it. Nm taxation and revenue For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. Nm taxation and revenue Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. Nm taxation and revenue The property class generally determines the depreciation method, recovery period, and convention. Nm taxation and revenue The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. Nm taxation and revenue Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Nm taxation and revenue 5-year property. Nm taxation and revenue This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Nm taxation and revenue ), automobiles, and light trucks. Nm taxation and revenue This class also includes appliances, carpeting, furniture, etc. Nm taxation and revenue , used in a residential rental real estate activity. Nm taxation and revenue Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. Nm taxation and revenue See chapter 5 of Publication 946. Nm taxation and revenue 7-year property. Nm taxation and revenue This class includes office furniture and equipment (desks, file cabinets, etc. Nm taxation and revenue ). Nm taxation and revenue This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. Nm taxation and revenue 15-year property. Nm taxation and revenue This class includes roads, fences, and shrubbery (if depreciable). Nm taxation and revenue Residential rental property. Nm taxation and revenue 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. Nm taxation and revenue It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. Nm taxation and revenue 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. Nm taxation and revenue The other property classes do not generally apply to property used in rental activities. Nm taxation and revenue These classes are not discussed in this publication. Nm taxation and revenue See Publication 946 for more information. Nm taxation and revenue Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Nm taxation and revenue The recovery periods are generally longer under ADS than GDS. Nm taxation and revenue The recovery period of property depends on its property class. Nm taxation and revenue Under GDS, the recovery period of an asset is generally the same as its property class. Nm taxation and revenue Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Nm taxation and revenue See Table 2-1 for recovery periods of property commonly used in residential rental activities. Nm taxation and revenue Qualified Indian reservation property. Nm taxation and revenue   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Nm taxation and revenue For more information, see chapter 4 of Publication 946. Nm taxation and revenue Additions or improvements to property. Nm taxation and revenue   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Nm taxation and revenue   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. Nm taxation and revenue   The recovery period for an addition or improvement to property begins on the later 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. Nm taxation and revenue Example. Nm taxation and revenue You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Nm taxation and revenue You built an addition onto the house and placed it in service in 2013. Nm taxation and revenue You must use MACRS for the addition. Nm taxation and revenue Under GDS, the addition is depreciated as residential rental property over 27. Nm taxation and revenue 5 years. Nm taxation and revenue Table 2-1. Nm taxation and revenue MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. Nm taxation and revenue 27. Nm taxation and revenue 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. Nm taxation and revenue   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Nm taxation and revenue 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 you dispose of the property. Nm taxation and revenue Mid-month convention. Nm taxation and revenue    A mid-month convention is used for all residential rental property and nonresidential real property. Nm taxation and revenue 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 that month. Nm taxation and revenue Mid-quarter convention. Nm taxation and revenue   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real 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 you place in service during the year. Nm taxation and revenue   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. Nm taxation and revenue Example. Nm taxation and revenue During the tax year, Tom Martin purchased the following items to use in his rental property. Nm taxation and revenue He elects not to claim the special depreciation allowance discussed earlier. Nm taxation and revenue A dishwasher for $400 that he placed in service in January. Nm taxation and revenue Used furniture for $100 that he placed in service in September. Nm taxation and revenue A refrigerator for $800 that he placed in service in October. Nm taxation and revenue Tom uses the calendar year as his tax year. Nm taxation and revenue The total basis of all property placed in service that year is $1,300. Nm taxation and revenue The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Nm taxation and revenue Tom must use the mid-quarter convention instead of the half-year convention for all three items. Nm taxation and revenue Half-year convention. Nm taxation and revenue    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Nm taxation and revenue 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. Nm taxation and revenue   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. Nm taxation and revenue You deduct a full year of depreciation for any other year during the recovery period. Nm taxation and revenue Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Nm taxation and revenue The deduction is substantially the same both ways. Nm taxation and revenue You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. Nm taxation and revenue In this publication we will use the percentage tables. Nm taxation and revenue For instructions on how to compute the deduction, see chapter 4 of Publication 946. Nm taxation and revenue Residential rental property. Nm taxation and revenue   You must use the straight line method and a mid-month convention for residential rental property. Nm taxation and revenue In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). Nm taxation and revenue 5-, 7-, or 15-year property. Nm taxation and revenue   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Nm taxation and revenue However, in limited cases you must use the mid-quarter convention, if it applies. Nm taxation and revenue For property in the 15-year class, use the 150% declining balance method and a half-year convention. Nm taxation and revenue   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Nm taxation and revenue The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Nm taxation and revenue You make this election on Form 4562. Nm taxation and revenue In Part III, column (f), enter “150 DB. Nm taxation and revenue ” Once you make this election, you cannot change to another method. Nm taxation and revenue   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. Nm taxation and revenue   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. Nm taxation and revenue The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Nm taxation and revenue You elect the straight line method on Form 4562. Nm taxation and revenue In Part III, column (f), enter “S/L. Nm taxation and revenue ” Once you make this election, you cannot change to another method. Nm taxation and revenue MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Nm taxation and revenue The tables show the percentages for the first few years or until the change to the straight line method is made. Nm taxation and revenue See Appendix A of Publication 946 for complete tables. Nm taxation and revenue The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. Nm taxation and revenue If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. Nm taxation and revenue How to use the percentage tables. Nm taxation and revenue   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Nm taxation and revenue   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. Nm taxation and revenue   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. Nm taxation and revenue For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . Nm taxation and revenue See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Nm taxation and revenue Unadjusted basis. Nm taxation and revenue   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. Nm taxation and revenue   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. Nm taxation and revenue For more information, see chapter 4 of Publication 946. Nm taxation and revenue Please click here for the text description of the image. Nm taxation and revenue Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Nm taxation and revenue   The percentages in these tables take into account the half-year and mid-quarter conventions. Nm taxation and revenue Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Nm taxation and revenue Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Nm taxation and revenue If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. Nm taxation and revenue Example 1. Nm taxation and revenue You purchased a stove and refrigerator and placed them in service in June. Nm taxation and revenue Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Nm taxation and revenue Both are 5-year property. Nm taxation and revenue Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Nm taxation and revenue For that year your depreciation deduction is $120 ($600 × . Nm taxation and revenue 20) for the stove and $200 ($1,000 × . Nm taxation and revenue 20) for the refrigerator. Nm taxation and revenue For Year 2, the depreciation percentage is 32%. Nm taxation and revenue That year's depreciation deduction will be $192 ($600 × . Nm taxation and revenue 32) for the stove and $320 ($1,000 × . Nm taxation and revenue 32) for the refrigerator. Nm taxation and revenue Example 2. Nm taxation and revenue Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Nm taxation and revenue Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . Nm taxation and revenue 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Nm taxation and revenue Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. Nm taxation and revenue Your depreciation deduction for the refrigerator is $50 ($1,000 x . Nm taxation and revenue 05). Nm taxation and revenue Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. Nm taxation and revenue For that year, your depreciation deduction for the stove is $150 ($600 x . Nm taxation and revenue 25). Nm taxation and revenue Table 2-2d. Nm taxation and revenue    Use this table when you are using the GDS 27. Nm taxation and revenue 5 year option for residential rental property. Nm taxation and revenue Find the row for the month that you placed the property in service. Nm taxation and revenue Use the percentages listed for that month to figure your depreciation deduction. Nm taxation and revenue The mid-month convention is taken into account in the percentages shown in the table. Nm taxation and revenue Continue to use the same row (month) under the column for the appropriate year. Nm taxation and revenue Example. Nm taxation and revenue You purchased a single family rental house for $185,000 and placed it in service on February 8. Nm taxation and revenue The sales contract showed that the building cost $160,000 and the land cost $25,000. Nm taxation and revenue Your basis for depreciation is its original cost, $160,000. Nm taxation and revenue This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. Nm taxation and revenue 5 years. Nm taxation and revenue Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Nm taxation and revenue 182%. Nm taxation and revenue That year's depreciation deduction is $5,091 ($160,000 x . Nm taxation and revenue 03182). Nm taxation and revenue Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Nm taxation and revenue See Appendix B in Publication 946 for other property. Nm taxation and revenue If your property is not listed in Appendix B, it is considered to have no class life. Nm taxation and revenue Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Nm taxation and revenue Use the mid-month convention for residential rental property and nonresidential real property. Nm taxation and revenue For all other property, use the half-year or mid-quarter convention, as appropriate. Nm taxation and revenue See Publication 946 for ADS depreciation tables. Nm taxation and revenue Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Nm taxation and revenue If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Nm taxation and revenue For more information, see Depreciation under Decreases to Basis in Publication 551. Nm taxation and revenue If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Nm taxation and revenue S. Nm taxation and revenue Individual Income Tax Return. Nm taxation and revenue If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Nm taxation and revenue Filing an amended return. Nm taxation and revenue   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Nm taxation and revenue You claimed the incorrect amount because of a mathematical error made in any year. Nm taxation and revenue You claimed the incorrect amount because of a posting error made in any year. Nm taxation and revenue You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Nm taxation and revenue You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Nm taxation and revenue   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. Nm taxation and revenue This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. Nm taxation and revenue   If an amended return is allowed, you must file it by the later of the following dates. Nm taxation and revenue 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Nm taxation and revenue A return filed before an unextended due date is considered filed on that due date. Nm taxation and revenue 2 years from the time you paid your tax for that year. Nm taxation and revenue Changing your accounting method. Nm taxation and revenue   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Nm taxation and revenue In some instances, that consent is automatic. Nm taxation and revenue For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Nm taxation and revenue Prev  Up  Next   Home   More Online Publications
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The Nm Taxation And Revenue

Nm taxation and revenue 1. Nm taxation and revenue   403(b) Plan Basics Table of Contents What Is a 403(b) Plan? What Are the Benefits of Contributing to a 403(b) Plan?Excluded. Nm taxation and revenue Deducted. Nm taxation and revenue Who Can Participate in a 403(b) Plan?Ministers. Nm taxation and revenue Who Can Set Up a 403(b) Account? How Can Contributions Be Made to My 403(b) Account? Do I Report Contributions on My Tax Return? How Much Can Be Contributed to My 403(b) Account? This chapter introduces you to 403(b) plans and accounts. Nm taxation and revenue Specifically, the chapter answers the following questions. Nm taxation and revenue What is a 403(b) plan? What are the benefits of contributing to a 403(b) plan? Who can participate in a 403(b) plan? Who can set up a 403(b) account? How can contributions be made to my 403(b) account? Do I report contributions on my tax return? How much can be contributed to my 403(b) account? What Is a 403(b) Plan? A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. Nm taxation and revenue Individual accounts in a 403(b) plan can be any of the following types. Nm taxation and revenue An annuity contract, which is a contract provided through an insurance company, A custodial account, which is an account invested in mutual funds, or A retirement income account set up for church employees. Nm taxation and revenue Generally, retirement income accounts can invest in either annuities or mutual funds. Nm taxation and revenue We use the term “403(b) account” to refer to any one of these funding arrangements throughout this publication, unless otherwise specified. Nm taxation and revenue What Are the Benefits of Contributing to a 403(b) Plan?  There are three benefits to contributing to a 403(b) plan. Nm taxation and revenue The first benefit is that you do not pay income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Nm taxation and revenue Allowable contributions to a 403(b) plan are either excluded or deducted from your income. Nm taxation and revenue However, if your contributions are made to a Roth contribution program, this benefit does not apply. Nm taxation and revenue Instead, you pay income tax on the contributions to the plan but distributions from the plan (if certain requirements are met) are tax free. Nm taxation and revenue Note. Nm taxation and revenue Generally, employees must pay social security and Medicare tax on their contributions to a 403(b) plan, including those made under a salary reduction agreement. Nm taxation and revenue See chapter 4, Limit on Elective Deferrals , for more information. Nm taxation and revenue The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them. Nm taxation and revenue Earnings and gains on amounts in a Roth contribution program are not taxed if your withdrawals are qualified distributions. Nm taxation and revenue Otherwise, they are taxed when you withdraw them. Nm taxation and revenue The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. Nm taxation and revenue See chapter 10, Retirement Savings Contributions Credit (Saver's Credit) . Nm taxation and revenue Excluded. Nm taxation and revenue   If an amount is excluded from your income, it is not included in your total wages on your Form W-2. Nm taxation and revenue This means that you do not report the excluded amount on your tax return. Nm taxation and revenue Deducted. Nm taxation and revenue   If an amount is deducted from your income, it is included with your other wages on your Form W-2. Nm taxation and revenue You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax. Nm taxation and revenue Who Can Participate in a 403(b) Plan? Any eligible employee can participate in a 403(b) plan. Nm taxation and revenue Eligible employees. Nm taxation and revenue   The following employees are eligible to participate in a 403(b) plan. Nm taxation and revenue Employees of tax-exempt organizations established under section 501(c)(3). Nm taxation and revenue These organizations are usually referred to as section 501(c)(3) organizations or simply 501(c)(3) organizations. Nm taxation and revenue Employees of public school systems who are involved in the day-to-day operations of a school. Nm taxation and revenue Employees of cooperative hospital service organizations. Nm taxation and revenue Civilian faculty and staff of the Uniformed Services University of the Health Sciences. Nm taxation and revenue Employees of public school systems organized by Indian tribal governments. Nm taxation and revenue Certain ministers (explained next). Nm taxation and revenue Ministers. Nm taxation and revenue   The following ministers are eligible employees for whom a 403(b) account can be established. Nm taxation and revenue Ministers employed by section 501(c)(3) organizations. Nm taxation and revenue Self-employed ministers. Nm taxation and revenue A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer. Nm taxation and revenue Ministers (chaplains) who meet both of the following requirements. Nm taxation and revenue They are employed by organizations that are not section 501(c)(3) organizations. Nm taxation and revenue They function as ministers in their day-to-day professional responsibilities with their employers. Nm taxation and revenue   Throughout this publication, the term chaplain will be used to mean ministers described in the third category in the list above. Nm taxation and revenue Example. Nm taxation and revenue A minister employed as a chaplain by a state-run prison and a chaplain in the United States Armed Forces are eligible employees because their employers are not section 501(c)(3) organizations and they are employed as ministers. Nm taxation and revenue Who Can Set Up a 403(b) Account? You cannot set up your own 403(b) account. Nm taxation and revenue Only employers can set up 403(b) accounts. Nm taxation and revenue A self-employed minister cannot set up a 403(b) account for his or her benefit. Nm taxation and revenue If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit. Nm taxation and revenue How Can Contributions Be Made to My 403(b) Account? Generally, only your employer can make contributions to your 403(b) account. Nm taxation and revenue However, some plans will allow you to make after-tax contributions (defined below). Nm taxation and revenue The following types of contributions can be made to 403(b) accounts. Nm taxation and revenue Elective deferrals . Nm taxation and revenue These are contributions made under a salary reduction agreement. Nm taxation and revenue This agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit. Nm taxation and revenue Except for Roth contributions, you do not pay income tax on these contributions until you withdraw them from the account. Nm taxation and revenue If your contributions are Roth contributions, you pay taxes on your contributions but any qualified distributions from your Roth account are tax free. Nm taxation and revenue Nonelective contributions . Nm taxation and revenue These are employer contributions that are not made under a salary reduction agreement. Nm taxation and revenue Nonelective contributions include matching contributions, discretionary contributions, and mandatory contributions from your employer. Nm taxation and revenue You do not pay income tax on these contributions until you withdraw them from the account. Nm taxation and revenue After-tax contributions . Nm taxation and revenue These are contributions (that are not Roth contributions) you make with funds that you must include in income on your tax return. Nm taxation and revenue A salary payment on which income tax has been withheld is a source of these contributions. Nm taxation and revenue If your plan allows you to make after-tax contributions, they are not excluded from income and you cannot deduct them on your tax return. Nm taxation and revenue A combination of any of the three contribution types listed above. Nm taxation and revenue Self-employed minister. Nm taxation and revenue   If you are a self-employed minister, you are considered both an employee and an employer, and you can contribute to a retirement income account for your own benefit. Nm taxation and revenue Do I Report Contributions on My Tax Return? Generally, you do not report contributions to your 403(b) account (except Roth contributions) on your tax return. Nm taxation and revenue Your employer will report contributions on your 2013 Form W-2. Nm taxation and revenue Elective deferrals will be shown in box 12 and the Retirement plan box will be checked in box 13. Nm taxation and revenue If you are a self-employed minister or chaplain, see the discussions next. Nm taxation and revenue Self-employed ministers. Nm taxation and revenue   If you are a self-employed minister, you must report the total contributions as a deduction on your tax return. Nm taxation and revenue Deduct your contributions on line 28 of the 2013 Form 1040. Nm taxation and revenue Chaplains. Nm taxation and revenue   If you are a chaplain and your employer does not exclude contributions made to your 403(b) account from your earned income, you may be able to take a deduction for those contributions on your tax return. Nm taxation and revenue    However, if your employer has agreed to exclude the contributions from your earned income, you will not be allowed a deduction on your tax return. Nm taxation and revenue   If you can take a deduction, include your contributions on line 36 of the 2013 Form 1040. Nm taxation and revenue Enter the amount of your deduction and write “403(b)” on the dotted line next to line 36. Nm taxation and revenue How Much Can Be Contributed to My 403(b) Account? There are limits on the amount of contributions that can be made to your 403(b) account each year. Nm taxation and revenue If contributions made to your 403(b) account are more than these contribution limits, penalties may apply. Nm taxation and revenue Chapters 2 through 6 provide information on how to determine the amount that can be contributed to your 403(b) account. Nm taxation and revenue Worksheets are provided in Chapter 9 to help you determine the maximum amount that can be contributed to your 403(b) account each year. Nm taxation and revenue Chapter 7, Excess Contributions , describes how to prevent excess contributions and how to get an excess contribution corrected. Nm taxation and revenue Prev  Up  Next   Home   More Online Publications