What are the IRS guidelines for depreciating a residential apartment in Israel owned by a US citizen for US tax purposes?
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To determine the correct depreciation method and recovery period for a residential apartment in Israel owned by a US citizen for US tax purposes, you must apply the rules under the Modified Accelerated Cost Recovery System (MACRS) as set out in the Internal Revenue Code (IRC) § 168 and related IRS guidance. The key considerations are:
1. Classification of the Property
- Residential Rental Property: Under IRC § 168(e)(2)(A), "residential rental property" is defined as any building or structure if 80% or more of its gross rental income for the taxable year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations, but does not include units used on a transient basis (e.g., hotels).
- A residential apartment in Israel that is rented out as a dwelling unit (not as a hotel or similar transient use) meets this definition.
2. Depreciation System: GDS vs. ADS
- General Rule: US taxpayers must use the General Depreciation System (GDS) unless required to use the Alternative Depreciation System (ADS).
- Foreign Use Requirement: However, under IRC § 168(g)(1)(A), any tangible property used predominantly outside the United States must be depreciated under ADS.
- Exception: There are exceptions for certain aircraft, vessels, and other property, but these do not apply to residential rental real estate.
Conclusion: A residential apartment in Israel is considered property used predominantly outside the US, so it must be depreciated under ADS.
3. Depreciation Method and Recovery Period under ADS
- Method: ADS requires the use of the straight line method (no accelerated depreciation).
- Recovery Period: For residential rental property, the ADS recovery period is 30 years for property placed in service after December 31, 2017, and 40 years for property placed in service before January 1, 2018.
4. Depreciable Basis
- The depreciable basis is generally the lesser of the property’s adjusted basis or its fair market value at the time it is placed in service as a rental, reduced by the value of land (which is not depreciable).
5. Convention
- The mid-month convention applies to residential rental property, meaning depreciation begins as if the property was placed in service in the middle of the month.
6. Section 179 and Bonus Depreciation
- Section 179 expensing and bonus depreciation are not available for residential rental property.
7. Reporting
- Depreciation is reported on Form 4562 and Schedule E of Form 1040.
8. Summary Table
10. Practical Steps
- Determine the depreciable basis (cost minus land value).
- Use the straight line method over 30 years (if placed in service after 12/31/2017).
- Apply the mid-month convention for the first and last year of service.
- Report depreciation on Form 4562 and Schedule E.
In summary: For US tax purposes, a US citizen who owns a residential apartment in Israel must depreciate the property using the straight line method over 30 years under the Alternative Depreciation System (ADS), with the mid-month convention, and may not claim Section 179 or bonus depreciation.
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