Depreciation When you use your property to produce income, such as rents, youcan recover (get back) some or all of what you paid for the propertythrough tax deductions. You do this by depreciating theproperty; that is, by deducting some of your cost on your tax returneach year. Several factors determine how much depreciation you can deduct. Themain factors are: (1) your basis in the property, (2) the recoveryperiod for the property, and (3) the depreciation method (includingconvention) used. You cannot simply deduct your mortgage or principalpayments as an expense. You can deduct depreciation only on the part of your property usedfor rental purposes. Depreciation reduces your basis for figuring gainor loss on a later sale or exchange. You may have to use Form 4562 to figure and report yourdepreciation. See How To Report Rental Income and Expenses,later. Also see Publication 946. Claiming the correct amount of depreciation.You should claim the correct amount of depreciation each tax year.If you did not claim depreciation that you were entitled to deduct,you must still reduce your basis in the property by the amount ofdepreciation that you should have deducted. If you did not deduct thecorrect amount of depreciation for property in any year, you may beable to make a correction for that year by filing Form 1040X,Amended U.S. Individual Income Tax Return. If you are notallowed to make the correction on an amended return, you can changeyour accounting method to claim the correct amount of depreciation.See Changing your accounting method, later. Amended return.If you did not deduct the correct amount of depreciation, you canfile an amended return to make any of the following three corrections. Bilbao hotelsTo correct a mathematical error made in any year. To correct a posting error made in any year. To correct the amount of depreciation for property for whichyou have not adopted a method of accounting for depreciation. If an amended return is allowed, you must file it by the later ofthe following. 3 years from the date you filed your original return for theyear in which you did not deduct the correct amount. 2 years from the time you paid your tax for thatyear. A return filed early is considered filed on the due date. If you have adopted a method of accounting for depreciation forproperty, you cannot change the method by filing an amended return.You have adopted a method of accounting for depreciation if you didnot deduct the correct amount of depreciation for the property on twoor more consecutively filed tax returns. Changing your accounting method.To change your accounting method, you must file Form 3115,Application for Change in Accounting Method, to get the consentof the IRS. In some instances, that consent is automatic. For moreinformation, see Changing Your Accounting Method inPublication 946. What can be depreciated.You can depreciate your property if it meets all the followingconditions. It is used in business or held for the production of income(such as rental property). It has a determinable useful life that extends substantiallybeyond the year it is placed in service. It is something that wears out, gets used up, decays,becomes obsolete, or loses value from natural causes. You can depreciate both real property, other than land(discussed next), and personal property. Real property. Real property is land and, generally, anything that is built on,growing on, or attached to land. Buildings, fences, sidewalks, andtrees are real property. Personal property. Personal property is property that is not real property. Furniture,appliances, and lawn mowers are personal property. Land.You can never depreciate land. The costs of clearing, grading,planting, and landscaping are usually all part of the cost of land andare not depreciable. Rented property.Generally, if you pay rent on property, you cannot depreciate thatproperty. Usually, only the owner can depreciate it. If you makepermanent improvements to the property, you may be able to depreciatethe improvements. See Additions or improvements to property,later. Cooperative apartments. If you rent your cooperative apartment to others, you can deductyour share of the cooperative housing corporation's depreciation. Figure your depreciation deduction as a tenant-stockholder in acooperative housing corporation in the following way. Figure the depreciation for all the depreciable realproperty owned by the corporation. (Depreciation methods are discussedlater.) 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 sharesoutstanding. Add to the amount figured in (a) any mortgage debt on theproperty on the date you bought the stock. Subtract from the amount figured in (b) any mortgage debtthat is not for the depreciable real property, such as the part forthe land. Subtract from (1) any depreciation for space owned by thecorporation that can be rented but cannot be lived in bytenant-stockholders. The result is the yearly depreciation asreduced. Divide the number of your shares of stock by the totalnumber of shares outstanding, including any shares held by thecorporation. Multiply the yearly depreciation as reduced (from (2)) bythe number you figured in (3). This is your share of the corporation'sdepreciation. Your depreciation deduction for the year cannot be more than thepart of your adjusted basis (defined later) in the stock of thecorporation that is for your rental property. See Cooperative apartments under What Can BeDepreciated in chapter 1 of Publication 946 for moreinformation. Cannot be more than basis.The total of all your yearly depreciation deductions cannot be morethan the cost or other basis of the property. For this purpose, youryearly depreciation deductions include any depreciation that you wereallowed to claim, even if you did not claim it. Table 3 Depreciation systems. There are three ways to figure depreciation. The depreciationsystem you use depends on the type of property and when it was placedin service. For property used in rental activities you use: MACRS for property placed in service after 1986, ACRS for property placed in service after 1980 but before1987, or Useful lives and either straight line or an acceleratedmethod of depreciation, such as the declining balance method, forproperty placed in service before 1981. Caution: This publication discusses MACRS only. If you need informationabout depreciating property placed in service before 1987, seePublication 534. If you placed property in service before 1999, continue to use thesame method of figuring depreciation that you used in the past. Section 179 deduction.caribbean stud pokerYou cannot claim the section 179 deduction for property held toproduce rental income (unless renting property is your trade orbusiness). See chapter 2 of Publication 946. Alternative minimum tax. If you use accelerated depreciation, you may have to file Form6251, Alternative Minimum Tax. Accelerateddepreciation includes MACRS, ACRS, and any other method that allowsyou to deduct more depreciation than you could deduct using a straightline method. Modified AcceleratedCost RecoverySystem (MACRS) In general, tangible property placed in service during 1999 isdepreciated using MACRS. MACRS consists of two systems that determine how you depreciateyour property. The main system is called the General DepreciationSystem (GDS). The second system is called the AlternativeDepreciation System (ADS). GDS is used to figure yourdepreciation deduction for property used in most rental activities,unless you elect ADS. To figure your MACRS deduction, you need to know the followinginformation about your property: Its recovery period, Its placed-in-service date, and Its depreciable basis. Personal home changed to rental use. You must use MACRS to figure the depreciation on property used asyour home and changed to rental property in 1999. Excluded property.You cannot use MACRS for certain personal property placed inservice in your rental property in 1999 if it had been previouslyplaced in service before MACRS became effective. Generally, personalproperty 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 someonerelated to the person) who owned or used it in 1986. However, theproperty is not excluded if your 1999 deduction under MACRS (using ahalf-year convention) is less than the deduction you would have underACRS. See What Cannot Be Depreciated Under MACRS inPublication 946 for more information. Recovery Periods Under GDS Each item of property that can be depreciated is assigned to aproperty class. The recovery period of the property depends on theclass the property is in. The property classes 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. The class to which property is assigned is determined by its classlife. Class lives and recovery periods for most assets are listed inAppendix B in Publication 946. Under GDS, property that you placed in service during 1999 in yourrental activities generally falls into one of the following classes.Also see Table 3. 5-year property. This class includes computersand peripheral equipment, office machinery (typewriters, calculators,copiers, etc.), automobiles, and light trucks. This class also includes appliances, carpeting, furniture, etc.,used in a rental real estate activity. Depreciation on automobiles, certain computers, and cellulartelephones is limited. See chapter 4 of Publication 946. 7-year property. This class includes officefurniture and equipment (desks, files, etc.). This class also includesany property that does not have a class life and that has not beendesignated by law as being in any other class. 15-year property. This class includes roads andshrubbery (if depreciable). Residential rental property. This class includesany real property that is a rental building or structure (including amobile home) for which 80% or more of the gross rental income for thetax year is from dwelling units. A dwelling unit is a house or anapartment used to provide living accommodations in a building orstructure. It does not include a unit in a hotel, motel, inn, or otherestablishment where more than half of the units are used on atransient basis. If you live in any part of the building or structure,the gross rental income includes the fair rental value of the part youlive in. Residential rental property is depreciated over 27.5years. Caution: The other recovery classes do not generally apply to property usedin rental activities. These classes are not discussed in thispublication. See Publication 946 for more information. Appliances, etc., used in a rental activity.Appliances, carpets, furniture, etc., used in a rental real estateactivity are classified as 5-year property. Before 1999, however, IRSpublications and Form 4562 classified this property as 7-yearproperty. If you previously claimed depreciation based on thatclassification, you can continue to do so for that property.Alternatively, you can choose to change your depreciation to base iton the property's classification as 5-year property. For information on how to change your depreciation deduction, seeClaiming the correct amount of depreciation at thebeginning of the discussion on depreciation, earlier. If you must fileForm 3115 to change your accounting method, the change is automaticand no user fee is required. Qualified Indian reservation property. For the applicable recovery period for qualified Indian reservationproperty, see Publication 946. Additions or improvements to property. Treat depreciable additions or improvements you make to anyproperty as separate property items for depreciation purposes. Therecovery period for an addition or improvement to property begins onthe later of: The date the addition or improvement is placed in service,or The date the property to which the addition or improvementwas made is placed in service. The class and recovery period of the addition or improvement is theone that would apply to the underlying property if it were placed inservice at the same time as the addition or improvement. Example.You own a residential rental house that you have been renting outsince 1980 and that you are depreciating under ACRS. You put anaddition onto the house and placed the improvement in service in 1999.You must use MACRS for the addition. Under MACRS, the addition isdepreciated as residential rental property. Placed-in-Service Date You can begin to depreciate property when you place it in servicein your trade or business or for the production of income. Property isconsidered placed in service in a rental activity when it is ready andavailable for a specific use in that activity. Example 1.On November 22 of last year, you purchased a dishwasher for yourrental property. The appliance was delivered on December 7, but wasnot installed and ready for use until January 3 of this year. Becausethe dishwasher was not ready for use last year, it is not consideredplaced in service until this year. If the appliance had been ready for use when it was delivered inDecember of last year, it would have been considered placed in servicein December, even if it was not actually used until this year. Example 2.On April 6, you purchased a house to use as residential rentalproperty. You made extensive repairs to the house and had it ready forrent on July 5. You began to advertise the house for rent in July andactually rented it out beginning September 1. The house is consideredplaced in service in July when it was ready and available for rent.You can begin to depreciate the house in July. Example 3.You moved from your home in July. During August and September youmade several repairs to the house. On October 1, you listed theproperty for rent with a real estate company, which rented it onDecember 1. The property is considered placed in service on October 1,the date when it was available for rent. Depreciable Basis The depreciable basis of property used in a rental activity isgenerally its adjusted basis when you place it in service in thatactivity. This is its cost or other basis when you acquired it,adjusted for certain items occurring before you place it in service inthe rental activity. Basis and adjusted basis are explained in thefollowing discussions. However, if you used the property for personal purposes beforechanging it to rental use, its depreciable basis is the lesser of itsadjusted basis or its fair market value when you change it to rentaluse. See Basis of Property Changed to Rental Use, later. Cost Basis The basis of property you buy is usually its cost. The cost is theamount you pay for it in cash or in other property or services. Yourcost also includes amounts you pay for: Sales tax charged on the purchase, Freight charges to obtain the property, and Installation and testing charges. Loans with low or no interest.If you buy property on any time-payment plan that charges little orno interest, the basis of your property is your stated purchase price,less the amount considered to be unstated interest. See UnstatedInterest and Original Issue Discount in Publication 537,Installment Sales. Real property.If you buy real property, such as a building and land, certain feesand other expenses you pay are part of your cost basis in theproperty. Real estate taxes. If you buy real property and agree to pay real estate taxes on itthat were owed by the seller, the taxes you pay are treated as part ofyour basis in the property. You cannot deduct them as taxes paid. If you reimburse the seller for real estate taxes the seller paidfor you, you can usually deduct that amount. Do not include thatamount in the basis of the property. Settlement fees and other costs.Settlement fees and closing costs that are for buying the propertyare part of your basis in the property. These include: Abstract fees, Charges for installing utility services, Legal fees, Recording fees, Surveys, Transfer taxes, Title insurance, and Any amounts the seller owes that you agree to pay, such asback taxes or interest, recording or mortgage fees, charges forimprovements or repairs, and sales commissions. Some settlement fees and closing costs you cannotinclude in the basis of the property are: Fire insurance premiums, Rent or other charges relating to occupancy of the propertybefore closing, and Charges connected with getting or refinancing a loan, suchas: 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. Also, do not include amounts placed in escrow for the futurepayment of items such as taxes and insurance. Assumption of a mortgage. Torquay alberghi aeroportualiIf you buy property and become liable for an existing mortgage onthe property, your basis is the amount you pay for the property plusthe amount that still must be paid on the mortgage. Example.You buy a building for $60,000 cash and assume a mortgage of$240,000 on it. Your basis is $300,000. Land and buildings.If you buy buildings and your cost includes the cost of the land onwhich they stand, you must divide the cost between the land and thebuildings to figure the basis for depreciation of the buildings.Thepart of the cost that you allocate to each asset is the ratio of thefair market value of that asset to the fair market value of the wholeproperty at the time you buy it. If you are not certain of the fair market values of the land andthe buildings, you can divide the cost between them based on theassessed values for real estate tax purposes. Example.cheap hotels in ManchesterYou buy a house and land for $100,000. The purchase contract doesnot specify how much of the purchase price is for the house and howmuch is for the land. The latest real estate tax assessment on the property was based onan assessed value of $80,000, of which $68,000 is for the house and$12,000 is for the land. You can allocate 85% ($68,000 $80,000) of the purchaseprice to the house and 15% ($12,000 $80,000) of the purchaseprice to the land. Your basis in the house is $85,000 (85% of $100,000) and your basisin the land is $15,000 (15% of $100,000). Basis Other Than Cost There are many times when you cannot use cost as a basis. Youcannot 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 resultof a divorce, or As an inheritance. If you received property in one of these ways, see Publication 551for information on how to figure your basis. Adjusted Basis Before you can figure allowable depreciation, you may have to makecertain adjustments (increases and decreases) to the basis of theproperty. The result of these adjustments to the basis is the adjustedbasis. Increases to basis. You must increase the basis of any property by the cost of allitems properly added to a capital account. This includes: The cost of any improvements having a useful life of morethan one year, Amounts spent after a casualty to restore the damagedproperty, The cost of extending utility service lines to the property,and Legal fees, such as the cost of defending and perfectingtitle. Improvements.Add to the basis of your property the amount an improvementactually cost you, including any amount you borrowed to make theimprovement. This includes all direct costs, such as material andlabor, but not your own labor. It also includes all expenses relatedto the improvement. For example, if you had an architect draw up plans for remodelingyour property, the architect's fee is a part of the cost of theremodeling. Or, if you had your lot surveyed to put up a fence, thecost of the survey is a part of the cost of the fence. Keep separate accounts for depreciable improvements made after youplace the property in service in your rental activity. For informationon depreciating improvements, see Additions or improvements toproperty, earlier, under Recovery Periods Under GDS. Caution: The cost of landscaping improvements is usually treated as anaddition to the basis of the land, which is not depreciable property.See What can be depreciated, earlier. Assessments for local improvements.Assessments for items which tend to increase the value of property,such as streets and sidewalks, must be added to the basis of theproperty. For example, if your city installs curbing on the street infront of your house, and assesses you and your neighbors for the costof curbing, you must add the assessment to the basis of your property.Also add the cost of legal fees paid to obtain a decrease in anassessment levied against property to pay for local improvements. Youcannot deduct these items as taxes or depreciate them. Assessments for maintenance or repair or meeting interest chargesare deductible as taxes. Do not add them to your basis in theproperty. Deducting vs. capitalizing costs.You cannot add to your basis costs that are deductible as currentexpenses. However, there are certain costs you can choose either todeduct or to capitalize. If you capitalize these costs, include themin your basis. If you deduct them, do not include them in your basis. The costs you may be able to choose to deduct or to capitalizeinclude carrying charges, such as interest and taxes, that you mustpay to own property. For more information about deducting or capitalizing costs, seechapter 11 in Publication 535. Decreases to basis. You must decrease the basis of your property by any items thatrepresent a return of your cost. These include: The amount of any insurance or other payment you receive asthe result of a casualty or theft loss, Any deductible casualty loss not covered byinsurance, Any amount you receive for granting an easement, Any residential energy credit you were allowed before 1986,if you added the cost of the energy items to the basis of your home,and The amount of depreciation you could have deducted on yourtax returns under the method of depreciation you selected. If you tookless depreciation than you could have under the method you selected,you must decrease the basis by the amount you could have taken underthat method. If you deducted more depreciation than you should have, you mustdecrease your basis by the amount you should have deducted, plus thepart of the excess you deducted that actually lowered your taxliability for any year. Basis of PropertyChanged to Rental Use When you change property you held for personal use to rental use(for example, you rent out your former home), you figure the basis fordepreciation using the lesser of fair market value or adjusted basis. Fair market value. This is the price at which the property would change hands betweena buyer and a seller, neither having to buy or sell, and both havingreasonable knowledge of all the relevant facts. Sales of similarproperty, on or about the same date, may be helpful in figuring thefair market value of the property. Figuring the basis.The basis for depreciation is the lesser of: The fair market value of the property on the date youchanged it to rental use, or Your adjusted basis on the date of the change--that is,your original cost or other basis of the property, plus the cost ofpermanent improvements or additions since you acquired it, minusdeductions for any casualty or theft losses claimed on earlier years'income tax returns and other decreases to basis. Example.Several years ago you built your home for $40,000 on a lot thatcost you $4,000. Before changing the property to rental use last year,you added $8,000 of permanent improvements to the house and claimed a$1,000 deduction for a casualty loss to the house. Because land is notdepreciable, you can only include the cost of the house when figuringthe basis for depreciation. The adjusted basis of the house at the time of the change in usewas $47,000 ($40,000 + $8,000 - $1,000). On the date of the change in use, your property had a fair marketvalue of $48,000, of which $6,000 was for the land and $42,000 was forthe house. The basis for depreciation on the house is the fair market value atthe date of the change ($42,000), because it is less than youradjusted basis ($47,000). MACRS DepreciationUnder GDS You can figure your MACRS depreciation deduction under GDS in oneof two ways. The deduction is substantially the same both ways. (Thedifference, if any, is slight.) You can either: Actually compute the deduction using the depreciation methodand convention that apply over the recovery period of the property,or Use the percentage from the optional MACRS tables. If you actually compute the deduction, the depreciation methodyou use depends on the class of the property. 5-, 7-, or 15-year property.For property in the 5- or 7-year class, you use the double (200%)declining balance method and a half-year convention. You must use themid-quarter convention, if it applies. These conventions are explainedlater. For property in the 15-year class, you use the 150% decliningbalance method and a half-year convention. You can also choose to use the 150% declining balance method forproperty in the 5- or 7-year class. You make this election on Form4562. In column (f), Part II, enter "150 DB." You must change from either declining balance method to thestraight line method in the first tax year that the straight linemethod gives you a larger deduction. You can also choose to use the straight line method with ahalf-year or mid-quarter convention for 5-, 7-, or 15-year property.The choice to use the straight line method for one item in a class ofproperty applies to all property in that class that is placed inservice during the tax year of the election. You elect the straightline method on Form 4562. In column (f), Part II, enter "S/L."Once you make this election, you cannot change to another method. Residential rental property.You must use the straight line method and a mid-month convention(explained later) for residential rental property. Declining Balance Method To figure your MACRS deduction, first determine your decliningbalance rate from the table below. However, if you elect to use the150% declining balance method for 5- or 7-year property, figure thedeclining balance rate by dividing 1.5 (150%) by the recovery periodfor the property. In the first tax year, multiply the adjusted basis of the propertyby the declining balance rate and apply the appropriate convention tofigure your depreciation. In later years, use the following steps tofigure your depreciation. Adjust your basis by subtracting the amount of depreciationallowable for the earlier years. Multiply your adjusted basis in (1) by the same rate used inthe first year. See Conventions, later, for information ondepreciation in the year you dispose of property. Declining balance rates.The following table shows the declining balance rate that appliesfor each class of property and the first year for which the straightline method will give a greater deduction. (The rates for 5- and7-year property are based on the 200% declining balance method. Therate for 15-year property is based on the 150% declining balancemethod.) Class Declining Balance Rate Year 5 40% 4th 7 28.57% 5th 15 10% 7th Straight Line Method To figure your MACRS deduction under the straight line method, youmust figure a new depreciation rate for each tax year in the recoveryperiod. For any tax year, figure the straight line rate by dividing thenumber 1 by the years remaining in the recovery period at thebeginning of the tax year. When figuring the number of yearsremaining, you must take into account the convention used in the firstyear. If the remaining recovery period at the beginning of the taxyear is less than one year, the straight line rate for that tax yearis 100%. Multiply the adjusted basis of the property by the straight linerate. You must figure the depreciation for the first year using theconvention that applies. (See Conventions, later.) Example.For property with a 5-year recovery period, the straight line rateis 20% (1 divided by 5) for the first tax year. After you apply thehalf-year convention, the first year rate is 10% (20% divided by 2). At the beginning of the second year, the remaining recovery periodis 4 1/2 years because of the half-year convention. Thestraight line rate for the second year is 22.22% (1 divided by 4.5). To figure your depreciation deduction for the second year: Subtract the depreciation taken in the first year from thebasis of the property, and Multiply the remaining basis in (1) by 22.22%. Residential rental property.In the first year that you claim depreciation for residentialrental property, you can only claim depreciation for the number ofmonths the property is in use, and you must use the mid-monthconvention (explained under Conventions, next). Conventions In the year that you place property in service or in the year thatyou dispose of property, you are allowed to claim depreciation foronly part of the year. The part of the year (or convention) depends onthe class of the property. For residential rental property, use a mid-month convention in allsituations. Use a half-year convention for property used in rentalactivities, other than residential rental property. (However, incertain circumstances, you must use a mid-quarter convention.) Half-year convention.The half-year convention treats all property placed in service, ordisposed of, during a tax year as placed in service, or disposed of,in the middle of that tax year. A half year of depreciation is allowable for the first yearproperty is placed in service, regardless of when the property isplaced in service during the tax year. For each of the remaining yearsof the recovery period, you will take a full year of depreciation. Ifyou hold the property for the entire recovery period, a half year ofdepreciation is allowable for the year in which the recovery periodends. If you dispose of the property before the end of the recoveryperiod, a half year of depreciation is allowable for the year ofdisposition. Mid-quarter convention.Under a mid-quarter convention, all property placed in service, ordisposed of, during any quarter of a tax year is treated as placed inservice, or disposed of, in the middle of the quarter. A mid-quarter convention must be used in certain circumstances forproperty used in rental activities, other than residential rentalproperty. This convention applies if the total basis of such propertythat is placed in service in the last 3 months of a tax year is morethan 40% of the total basis of all such property you place in serviceduring the year. Do not include in the total basis any property placed in serviceand disposed of during the same tax year. Example.During the tax year, Tom Martin purchased the following items touse in his rental property. A dishwasher for $400, which he placed in service inJanuary. Used furniture for $100, which he placed in service inSeptember. A refrigerator for $500, which he placed in service inOctober. Tom uses the calendar year as his tax year. The total basis ofall property placed in service that year is $1,000. The $500 basis ofthe refrigerator placed in service during the last 3 months of his taxyear exceeds $400 (40% $1,000). Tom must use the mid-quarterconvention for all three items. Mid-month convention.Under a mid-month convention, residential rental property placed inservice, or disposed of, during any month is treated as placed inservice, or disposed of, in the middle of that month. Optional Tables You can use the tables in Table 4 to compute annualdepreciation under MACRS. The tables show the percentages for thefirst 6 years. See Appendix A of Publication 946 forcomplete tables. The percentages in Tables 4-A,4-B, and 4-C make the change fromdeclining balance to straight line in the year that straight line willyield a larger deduction. See Declining Balance Method,earlier. If you elect to use the straight line method for 5-, 7-, or 15-yearproperty, or the 150% declining balance method for 5- or 7-yearproperty, use the tables in Appendix A of Publication 946. How to use the tables.The following section explains how to use the optional tables. Figure the depreciation deduction by multiplying your unadjustedbasis in the property by the percentage shown in the appropriatetable. Your unadjusted basis is your depreciable basiswithout reduction for depreciation previously claimed. Once you begin using an optional table to figure depreciation, youmust continue to use it for the entire recovery period unless there isan 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 separateitem of property. If there is an adjustment for any other reason (for example,because of a deductible casualty loss) you can no longer use thetable. For the year of the adjustment and for the remaining recoveryperiod, figure depreciation using the property's adjusted basis at theend of the year and the appropriate depreciation method, as explainedearlier under MACRS Depreciation Under GDS. Tables 4-A, 4-B, and 4-C.The percentages in these tables take into account the half-year andmid-quarter conventions. Use Table 4-A for 5-yearproperty, Table 4-B for 7-year property, andTable 4-C for 15-year property. Use the percentage inthe second column (half-year convention) unless you must use themid-quarter convention (explained earlier). If you must use themid-quarter convention, use the column that corresponds to thecalendar year quarter in which you placed the property in service. Example 1.You purchased a stove and refrigerator and placed them in servicein February. Your basis in the stove is $300 and your basis in therefrigerator is $500. Both are 5-year property. Using the half-yearconvention column in Table 4-A, you find thedepreciation percentage for year 1 is 20%. For that year yourdepreciation deduction is $60 ($300  .20) for the stove and$100 ($500 .20) for the refrigerator. For year 2, you find your depreciation percentage is 32%. Thatyear's depreciation deduction will be $96 ($300 .32) for thestove and $160 ($500 .32) for the refrigerator. Example 2.Assume the same facts as in Example 1, except you buy therefrigerator in October instead of February. You must use themid-quarter convention to figure depreciation on the stove andrefrigerator. The refrigerator was placed in service in the last 3months of the tax year, and its basis ($500) is more than 40% of thetotal basis of all property placed in service during the year ($800 .40 = $320). Because you placed the refrigerator in service in October, you usethe fourth quarter column of Table 4-A and find thatthe depreciation percentage for year 1 is 5%. Your depreciationdeduction for the refrigerator is $25 ($500 .05). Because you placed the stove in service in February, you use thefirst quarter column of Table 4-A and find that thedepreciation percentage for year 1 is 35%. For that year, yourdepreciation deduction for the stove is $105 ($300 .35). Table 4-D.Use this table for residential rental property. Find the row forthe month that you placed the property in service. Use the percentageslisted for that month to figure your depreciation deduction. Themid-month convention is taken into account in the percentages shown inthe table. Example.You purchased a single family rental house and placed it in servicein February. Your basis in the house is $80,000. Using Table4-D, you find that the percentage for property placed inservice in February of year 1 is 3.182%. That year's depreciationdeduction is $2,546 ($80,000 .03182). Table 4 MACRS DepreciationUnder ADS If you choose, you can use the ADS method for most property. UnderADS, you use the straight line method of depreciation. Table 3 shows the recovery periods for property used inrental activities that you depreciate under ADS. See Appendix B in Publication 946 for other property. Ifyour property is not listed, it is considered to have no class life. Use the mid-month convention for residential rental property. Forall other property, use the half-year or mid-quarter convention. Election.You choose to use ADS by entering the depreciation on line 16, PartII of Form 4562. The election of ADS for one item in a class of property generallyapplies to all property in that class that is placed in service duringthe tax year of the election. However, the election applies on aproperty-by-property basis for residential rental property. Once you choose to use ADS, you cannot change your election.