Criteria for Depreciating Property in Business or Income Activities

When it comes to managing property as an immigrant or newcomer to the United States 🇺🇸, understanding how depreciation works can make a big difference in your tax situation. Depreciation is a tax benefit that lets a taxpayer spread out the cost of certain property over several years, reducing taxable income each year. This process can seem complicated, but breaking it down step by step helps make it easier to follow. Here’s a comprehensive guide to the entire depreciation journey, from figuring out if your property qualifies to reporting it correctly on your tax return.

Step 1: Determine If Your Property Qualifies for Depreciation

The first step is to check if your property meets all the requirements for depreciation. Not all property can be depreciated. To qualify, the property must meet these four main rules:

• Ownership: You must own the property. Even if you have a loan on it, as long as you are the owner, you can claim depreciation. If you make improvements to property you lease, you may also be able to depreciate those improvements.
• Business or Income-Producing Use: The property must be used in a business or to produce income. For example, rental property, office equipment, or a vehicle used for work can qualify. Property used only for personal reasons, like your family car or your main home (unless part of it is used for business), cannot be depreciated.
• Determinable Useful Life: The property must have a useful life that can be measured. This means it will wear out, get used up, or lose value over time. Land itself does not wear out, so it cannot be depreciated, but things like fences or parking lots built on land can be.
• Expected to Last More Than One Year: The property should be expected to last longer than one year after you start using it for business or to earn income.

If your property meets all these requirements, you can move on to the next step.

Step 2: Identify the Type of Property

Next, figure out what type of property you have. This affects how you depreciate it and for how long. The main types include:

• Tangible Personal Property: This covers things you can touch and move, like computers, furniture, machinery, vehicles, and equipment.
• Buildings and Structural Components: This includes houses or apartments you rent out (residential rental property) and commercial buildings. Residential rental property is depreciated over 27.5 years, while commercial buildings are depreciated over 39 years.
• Land Improvements: These are things added to land, such as fences, landscaping, or parking lots. The land itself is not depreciable, but these improvements are.
• Listed Property: This is property that can be used for both business and personal reasons, like cars or computers. You can only depreciate the part used for business. If you use a vehicle for business more than 50% of the time, you may be able to claim a larger deduction.

Step 3: Place the Property in Service

Depreciation doesn’t start until the property is “placed in service.” This means it’s ready and available for its specific business use, even if you’re not using it every day. For example, if you buy a rental house and finish repairs in March, but don’t find a tenant until June, you can start depreciating the property in March when it was ready to rent.

Step 4: Choose the Right Depreciation Method

The United States 🇺🇸 tax system uses the Modified Accelerated Cost Recovery System (MACRS) for most property. MACRS assigns different “class lives” to different types of property, which determines how long you can depreciate them. For example:

• Residential rental property: 27.5 years (straight-line method)
• Commercial buildings: 39 years (straight-line method)
• Most equipment and vehicles: 3, 5, or 7 years (accelerated methods)

You may also be able to use bonus depreciation for certain property. Bonus depreciation lets you deduct a large part of the property’s cost in the first year. However, the percentage you can claim is going down each year:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0%

So, if you buy and place property in service in 2025, you can deduct 40% of its cost right away, then depreciate the rest over the normal period.

Step 5: Calculate the Depreciation Deduction

To figure out your deduction, you need:

• The cost of the property (including sales tax, delivery, and installation)
• The percentage of business use (if not used 100% for business)
• The correct recovery period and method (from MACRS tables)

For example, if you buy a $10,000 computer and use it 80% for your business, you can only depreciate $8,000. If you qualify for bonus depreciation in 2025, you could deduct $3,200 (40% of $8,000) in the first year, then spread the rest over the next few years.

Step 6: Keep Good Records

Accurate recordkeeping is essential. The IRS requires you to keep records showing:

• When and how you acquired the property
• The cost of the property
• How you use the property (especially for listed property like vehicles)
• How you calculated each year’s depreciation

If you use property for both business and personal reasons, only the business-use portion can be depreciated. For example, if you use your car 60% for work and 40% for personal reasons, you can only depreciate 60% of the car’s cost.

Farmers have a special rule: if you use a vehicle in your farming business most of the day, you can claim 75% business use without keeping detailed records.

Step 7: Report Depreciation on Your Tax Return

You must report depreciation each year using IRS Form 4562. This form lets you list all your depreciable property, the method used, and the amount you’re claiming. You can find the latest version of Form 4562 on the IRS website.

If you’re unsure about any part of the process, the IRS provides detailed instructions in Publication 946: How To Depreciate Property, which is updated each year.

Step 8: End Depreciation When Required

Depreciation ends when you’ve recovered the full cost of the property or when you retire it from service (sell, scrap, or no longer use it for business). If you sell the property, you may have to “recapture” some of the depreciation as income, which can affect your taxes.

What to Expect from the IRS and Authorities

• Review and Audits: The IRS may review your depreciation claims, especially for listed property. Keeping good records helps you prove your claims.
• Updates and Changes: Tax laws change often. Bonus depreciation is set to phase out by 2027 unless Congress makes changes. Always check the latest IRS publications or consult a tax professional.
• Support: The IRS offers help through its website and Taxpayer Assistance Centers. You can also get help from qualified tax advisors.

Practical Tips and Common Scenarios

• If you use part of your home as a home office, you can depreciate only the business-use portion, usually over 39 years.
• Improvements you make to rental property, like adding a new roof, can be depreciated separately.
• If you use property for both business and personal reasons, keep a log or calendar to track business use.
• For immigrants new to the United States 🇺🇸, understanding these rules can help you save money and avoid problems with your taxes.

Key Takeaways

• Only property used for business or to produce income can be depreciated.
• Depreciation starts when the property is ready for use, not just when you start using it.
• Use the correct IRS forms and keep detailed records.
• Bonus depreciation is still available in 2025 but is being phased out.
• Always check the latest IRS guidance or talk to a tax professional if you’re unsure.

As reported by VisaVerge.com, proper use of depreciation can help taxpayers, including immigrants and newcomers, manage their tax bills and make the most of their property investments. For more official information, visit the IRS Depreciation page.

By following these steps and staying informed, you can handle depreciation with confidence and make sure you’re following the rules while getting the tax benefits you deserve.

Learn Today

Depreciation → A tax benefit allowing cost spreading of property over years, reducing taxable income annually.
MACRS → Modified Accelerated Cost Recovery System; U.S. tax method assigning recovery periods for property depreciation.
Bonus Depreciation → A tax deduction allowing a large percentage of property cost to be deducted in the first year.
Listed Property → Property used for both business and personal reasons with depreciation limited to business-use percentage.
IRS Form 4562 → The official tax form used to report depreciation deductions and property placed in service.

This Article in a Nutshell

Understanding property depreciation helps immigrants reduce taxes by spreading costs over years. Start when property qualifies and is ready, use IRS rules, and track usage carefully for accurate tax benefits and compliance.
— By VisaVerge.com