How do landlords calculate carpeting depreciation for rental properties?
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To calculate depreciation for carpeting in rental properties, landlords must determine the correct recovery period, depreciation method, and convention under the Modified Accelerated Cost Recovery System (MACRS). The process is as follows:
1. Determine the Property Classification and Recovery Period
Under MACRS, carpeting installed in a rental property is considered tangible personal property, not part of the building’s structural components. According to IRS guidance and the MACRS tables:
- Carpeting used in rental property is classified as 5-year property under the General Depreciation System (GDS).
2. Depreciation Method
- The default method for 5-year property under GDS is the 200% declining balance method, switching to straight line when it yields a greater deduction.
- Taxpayers may elect to use the 150% declining balance or straight line method, but this election must apply to all property in the same class placed in service during the year and is irrevocable for that year.
3. Depreciation Convention
- The half-year convention is generally used for personal property, including carpeting. This means all property placed in service during the year is treated as placed in service at the midpoint of the year.
- If more than 40% of the basis of all MACRS property (excluding real property) is placed in service in the last three months of the year, the mid-quarter convention applies instead.
4. Basis for Depreciation
- The depreciable basis is the cost of the carpeting (including installation), reduced by any Section 179 deduction or bonus depreciation claimed.
5. Section 179 and Bonus Depreciation
- Section 179: Landlords may elect to expense the full cost of carpeting in the year placed in service, up to the annual limit, provided the property is used more than 50% for business and the taxpayer has sufficient business income. For 2025, the Section 179 limit is $1,250,000, with a phase-out threshold of $3,130,000.
- Bonus Depreciation: For 2025, bonus depreciation is 40% for property acquired before January 20, 2025, and 100% for property acquired after January 19, 2025, and placed in service in 2025 or later.
6. Annual Depreciation Calculation
If Section 179 and bonus depreciation are not claimed (or only partially claimed), the remaining basis is depreciated over 5 years using the 200% declining balance method and the half-year convention. The IRS provides percentage tables for this calculation:
- Year 1: 20.00%
- Year 2: 32.00%
- Year 3: 19.20%
- Year 4: 11.52%
- Year 5: 11.52%
- Year 6: 5.76%
These percentages are applied to the unadjusted basis (cost minus any Section 179 or bonus depreciation).
Example Calculation
Suppose a landlord installs carpeting in a rental property at a cost of $5,000 in 2025, does not claim Section 179 or bonus depreciation, and uses the half-year convention:
- Year 1: $5,000 × 20% = $1,000
- Year 2: $5,000 × 32% = $1,600
- Year 3: $5,000 × 19.2% = $960
- Year 4: $5,000 × 11.52% = $576
- Year 5: $5,000 × 11.52% = $576
- Year 6: $5,000 × 5.76% = $288
Total depreciation over 6 years equals the original cost.
7. Reporting
- Depreciation is reported on Form 4562 and Schedule E (Form 1040) for rental property.
8. Special Considerations
- If the carpeting is replaced before the end of the recovery period, any remaining undepreciated basis may be deductible as a loss, subject to the rules for partial asset dispositions.
- If the property is used for both personal and rental purposes, only the portion allocable to rental use is depreciable.
Summary: Landlords depreciate carpeting in rental properties over 5 years using the 200% declining balance method and the half-year convention, unless Section 179 or bonus depreciation is claimed. The cost is recovered using IRS-provided percentages, and the deduction is reported on Form 4562 and Schedule E. Section 179 and bonus depreciation may allow for faster cost recovery, subject to eligibility and annual limits.
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