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Taxpayers may be required to use ADS or otherwise may elect which of the three lives to use. Lives for personal property vary from 3 years to 20 years. Land improvements must be depreciated over 15 or 20 years. Other real property must be depreciated over 27.5 years for residential property, 39 years for business property, and 40 years under ADS.
Section 168(e)(1) provides a table for determining the applicable recovery period. Following our 7 year railroad track, the table states that property with a useful life of more than 4 years but less than 10 years will be treated as 5 year property. Finally, it is important to determine the applicable convention for depreciation.
Consider you are a taxpayer with five-year property worth $50,000. Also, assume that the property depreciates $10,000 per year. Year 1- limited to half of the deduction normally entitled in a full year. One deduction of $5,000 allowed at the end of the year, since the property is put into service on July 1, year 1. Year 2- $10,000 deduction taken.
The sum of the digits can also be determined by using the formula (n 2 +n)/2 where n is equal to the useful life of the asset in years. The example would be shown as (5 2 +5)/2=15 Depreciation rates are as follows: 5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the 3rd year, 2/15 for the 4th year, and 1/15 for the 5th year.
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After three years, you’d have earned $900 in interest — $300 each year — for a total of $10,900 in your account. Now let's say you invest $10,000 in an account that pays 3% compounded annually.
If more than 40% of the total basis of property is placed in service during the last three months of the tax year, the mid-quarter convention applies. Exemptions include: Property that is being depreciated under a method other than MACRS. Any residential rental property, nonresidential real property, or railroad gradings and tunnel bores.