2. Depreciation — Publication 527

You recover the cost of income-producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.

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. You can’t simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense.

You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for figuring gain or loss on a later sale or exchange.

You may have to use Form 4562 to figure and report your depreciation. See Which Forms To Use in chapter 3. Also, see Pub. 946.

Section 179 deduction. 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. It is separate from your depreciation deduction. See chapter 2 of Pub. 946 for more information about claiming this deduction.

Alternative minimum tax (AMT). If you use accelerated depreciation, you may be subject to the AMT. 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).

The prescribed depreciation methods for rental real estate aren’t accelerated, so the depreciation deduction isn’t adjusted for the AMT. However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting).

Table 1-1.

Examples of Improvements

Additions Bedroom Bathroom Deck Garage Porch Patio

Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool

Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system

Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system

To find out if you are subject to the AMT, see the Instructions for Form 6251.