I have residential rental real property that I acquired
on Feb. 12, 2004, and sold on Oct. 16, 2006. Using the straight-line MACRS
method to depreciate the apartment building, how do I compute the depreciation
for the last year that I owned the building? Do I need to calculate for the months
that I actually owned the property, or do I use the MACRS table for the entire
Depreciation is a deduction that allows you to write off the
cost of your investment in income-producing property. For tax purposes, depreciation
is computed using the Modified Accelerated Cost Recovery System. Under MACRS,
assets are assigned a class life depending on their nature.
real estate that is not rental property is of course not depreciated, but residential
rental real estate is considered 27.5-year property. This means that the cost
of the property is depreciated over 27.5 years, which, expressed as a percentage,
equals 3.636 percent of the cost a year.
Under MACRS all real
property is depreciated on a straight-line basis over its class life. Straight
line means that the depreciation is basically computed by dividing the cost by
the number of years of its class life.
However since MACRS is a system,
we have systematic rules that include depreciation
conventions. Real property has a midmonth convention
for the year of purchase and the year of sale.
This means that you compute depreciation for the
year of purchase and sale based on the number
of full months in the year that you owned the
property, plus a half month for the purchase and
In 2004 you owned
the property for 10 full months (March through December) so you should get 10.5
months' depreciation for that year and 9.5 months for 2006. For 2006 your depreciation
is 9.5/12 multiplied by 3.636 percent, which equals 2.879 percent. For 2004, your
depreciation should have been 3.182 percent, and for 2005 it would have been 3.636
In total, your depreciation deductions add up to
9.697 percent of the cost of the property. This is the maximum amount of gain
on the sale subject to Section 1250 recapture. Remember Section 1250 recapture
is taxed at a higher rate than your long-term gain on the sale.