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Homeowners Tax Breaks Yor complete Guide to finding hidden gold in your home - Lassers J.K.

Lassers J.K. Homeowners Tax Breaks Yor complete Guide to finding hidden gold in your home - Wiley Publishing, 2004. - 258 p.
ISBN 0–471–44433–2
Download (direct link): lassershomeownerstaxbreaks2004.pdf
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YOUR VACATION HOME IS A TAX SHELTER 161
home use to business use, your tax basis for depreciation would be the lower of your cost for the home or its fair market value on the date of the conversion. The portion of cost or fair market value allocable to land is not depreciable.
You paid $250,000 for your vacation home and 20 percent of such cost, or $50,000, is allocable to the value of the land. You convert your vacation home to year-round rental use four years later, when the value of the entire property is $300,000. Since your $250,000 cost is lower than the fair market value of $300,000, your basis for depreciation is your cost, $250,000, less the portion of cost allocable to land, $50,000, or $200,000.
How to Figure the Deduction. The IRS has provided a table (Table 8.2) that gives you a short-cut way to figure depreciation on your vacation home used as rental property. The table appears in IRS Publication 527, “Residential Rental Property,” and is used for figuring the depreciation for residential rental property with a recovery period of 27.5 years, such as your vacation home. To use the table, find the row for the month you commenced renting the property. Then look under the column for the year involved opposite the month you commenced using the property.
table 8.2 Determining the Depreciation on Your Vacation Home
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Jan. 3.485% 3.636% 3.636% 3.636% 3.636% 3.636%
Feb. 3.182 3.636 3.636 3.636 3.636 3.636
March 2.879 3.636 3.636 3.636 3.636 3.636
Apr. 2.576 3.636 3.636 3.636 3.636 3.636
May 2.273 3.636 3.636 3.636 3.636 3.636
June 1.970 3.636 3.636 3.636 3.636 3.636
July 1.667 3.636 3.636 3.636 3.636 3.636
Aug. 1.364 3.636 3.636 3.636 3.636 3.636
Sept. 1.061 3.636 3.636 3.636 3.636 3.636
Oct. 0.758 3.636 3.636 3.636 3.636 3.636
Nov. 0.455 3.636 3.636 3.636 3.636 3.636
Dec. 0.152 3.636 3.636 3.636 3.636 3.636

162
TAX SHELTER FROM HOMEOWNER LOOPHOLES AND VACATION HOMES
For the recovery periods for various types of property you may use in your business, see Table 8.3.
You first placed your vacation home in service in January of this year by renting it to a year-round tenant. Your depreciation deduction is $6,970 ($200,000 x .03485).
As the example illustrates, the depreciation deduction does not require any current outlay. It is based on the original cost of the residence and it makes no difference that the original cost was paid for in part with a mortgage. Accordingly, since depreciation deductions reduce taxable income without any current cash outlay, they can be viewed as a “costless” deduction that can both shelter cash flow from property and create a tax loss that shelters other income.
Observation
What’s Depreciable Property? Depreciation deductions are allowed only for property used in a trade or business or held for the production of income, such as a vacation home held for rental. Depreciation deductions are not allowed for property used exclusively for personal purposes, such as the vacation home use illustrated in Scenario 1 in Section 8.2 and Scenario 2 in Section 8.3.
Check Collateral Damage. While depreciation deductions reduce your taxes, they also reduce the tax basis for the property. On a future sale of the property, gain is measured for tax purposes by the difference between your tax basis and the sales price for the property. Since depreciation deductions reduce your tax basis each year, it follows that gain on a later sale will be larger that it would have been in the absence of depreciation deductions.
Personal Property. So-called “personal” property, unlike “real” property, generally is anything that is movable, such as furniture and kitchen appliances. When you rent your vacation home together with personal property such as kitchen appliances and furniture, you can separately depreciate such
YOUR VACATION HOME IS A TAX SHELTER 163
property if you can establish its cost. The method for depreciating such personal property is described in IRS Publication 527, “Residential Rental Property.” This publication can be obtained at the IRS web site, www.irs.gov.
Table 8.3 shows the period for depreciation for various items of personal property as adapted from a table appearing in Publication 527, which should be consulted for determining how the deduction is computed.
table 8.3 Depreciation Recovery Periods for Property Used in Rental Activities
Recovery Period to Use
Type of Property General Depreciation System
Computers and their peripheral equipment 5 years
Office machinery, such as: Typewriters Calculators Copiers 5 years
Appliances, such as: Stoves Refrigerators 5 years
Carpets 5 years
Furniture used in rental property 5 years
Office furniture and equipment, such as: Desks Files 7 years
Roads 15 years
Shrubbery 15 years
Fences 15 years
Residential rental property (buildings or structures) and structural components such as furnaces, water pipes, venting, etc. 27.5 years
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