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You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. The allowance applies only for the first year you place the property in service. For qualified property placed in service in 2007, you can take an additional 50% (or 30%, if applicable) special allowance. The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service.
This chapter explains what is qualified property. It also includes rules regarding how to figure an allowance, how to elect not to claim an allowance, and when you must recapture an allowance.
See chapter 6 for information about getting publications and forms.
Business/investment use |
Improvement |
Nonresidential real property |
Placed in service |
Residential rental property |
Structural components |
Your property is qualified property if it is one of the following.
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Qualified Liberty Zone property.
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Qualified Gulf Opportunity Zone (GO Zone) property.
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Qualified cellulosic biomass ethanol plant property acquired by purchase after December 20, 2006.
The following discussions provide information about the types of qualified property listed above for which you can take the special depreciation allowance.
You can take a special depreciation allowance for qualified Liberty Zone property that is nonresidential real or residential rental property (defined next).
To be qualified Liberty Zone property, the property must also meet all of the following tests.
If the property is held for the production of income, the property does not satisfy this substantial use test and does not qualify for the special depreciation allowance.
September 10, 2001. Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. However, the cost of reconditioned or rebuilt property you acquired does not meet this test. Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20 percent of the total cost of the property. If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after you originally placed the property in service, the lessor is considered to be the original user of the property. For special rules identifying the original user of property involved in certain other transactions and the original user of fractional interests in property, see section 1.168(k)-1(b)(3) of the regulations.
Qualified Liberty Zone property does not include any of the following.
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified Liberty Zone property.
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Property that also qualified for the special depreciation allowance.
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Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Qualified Liberty Zone leasehold improvement property, defined in chapter 4.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
You can take a special depreciation allowance for qualified Gulf Opportunity Zone (GO Zone) property. The property must meet the following requirements.
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It is one of the following types of property.
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Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. See Which Method Can You Use To Depreciate Your Property in
chapter 1. -
Water utility property, which is either of the following.
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Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property.
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Any municipal sewer.
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Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.
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Qualified leasehold improvement property, defined below.
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Certain nonresidential real property and residential rental property.
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It is property that meets certain tests, explained under Other Tests To Be Met on this page.
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It is not excepted property, explained under Excepted Property on page 27.
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The improvement is made under or according to a lease by the lessee (or any sublessee) or the lessor of that part of the building.
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That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.
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The improvement is placed in service more than 3 years after the date the building was first placed in service by any person.
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The improvement is section 1250 property. See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the definition of section 1250 property.
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The enlargement of the building.
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Any elevator or escalator.
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Any structural component benefiting a common area.
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The internal structural framework of the building.
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Members of an affiliated group.
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An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant.
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A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation.
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Two corporations that are members of the same controlled group.
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A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust.
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The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
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The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts.
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A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization.
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Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the outstanding stock of each corporation.
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A corporation and a partnership if the same persons own both of the following.
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80% or more of the value of the outstanding stock of the corporation.
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80% or more of the capital or profits interest in the partnership.
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The executor and beneficiary of any estate.
To be qualified GO Zone property, the property must also meet all of the following tests.
If the property is held for the production of income, the property does not satisfy this substantial use test and does not qualify for the special depreciation allowance.
Qualified GO Zone property does not include any of the following.
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Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a qualified business use. For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code.
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Any qualified revitalization building (described below) for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures.
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Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
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Any gambling or animal racing property (defined below).
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified GO Zone property.
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Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing.
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Any real property determined by square footage (other than any portion that is less than 100 square feet) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing.
You can take a special depreciation allowance for qualified cellulosic biomass ethanol plant property. Cellulosic biomass ethanol means ethanol produced by hydrolysis of any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. Examples include bagasse (from sugar cane), corn stalks, and switchgrass. The property must meet the following requirements.
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The property is used in the United States solely to produce cellulosic biomass ethanol.
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The original use of the property must begin with you after December 20, 2006.
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You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2) after December 20, 2006, with no binding written contract for the acquisition in effect before December 21, 2006.
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The property must be placed in service for use in your trade or business or for the production of income before January 1, 2013.
Qualified cellulosic biomass ethanol plant property does not include any of the following.
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Property placed in service and disposed of in the same tax year.
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Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified cellulosic biomass ethanol plant property.
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Property required to be depreciated using the Alternative Depreciation System (ADS). For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies, in chapter 4.
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Property financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal Revenue Code.
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Property for which you elected not to claim any special depreciation allowance (discussed later).
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Property for which a deduction was taken under section 179C for certain qualified refinery property.
Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50% (or 30% if applicable). For qualified Liberty Zone property, multiply the depreciable basis by 30%. For qualified GO Zone property and qualified cellulosic biomass ethanol plant property, multiply the depreciable basis by 50%.
For qualified property other than listed property, enter the special allowance on line 14 in Part II of Form 4562. For qualified property that is listed property, enter the special allowance on line 25 in Part V of Form 4562.
If you place qualified property in service in a short tax year, you can take the full amount of a special depreciation allowance.
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Any section 179 deduction.
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Any deduction for removal of barriers to the disabled and the elderly.
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Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services.
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Basis adjustment to investment credit property under section 50(c) of the Internal Revenue Code.
Example 1.
On November 1, 2007, Tom Brown bought and placed in service in his business qualified GO Zone property that cost $305,000. He did not elect to claim a section 179 deduction. He deducts 50% of the cost ($152,500) as a special depreciation allowance for 2007. He uses the remaining $152,500 of cost to figure his regular MACRS depreciation deduction for 2007 and later years.
Example 2.
The facts are the same as in Example 1, except that Tom elects to deduct $225,000 ($125,000 + the increased dollar limit of $100,000 for qualified GO Zone property) of the property's cost as a section 179 deduction. He uses the remaining $80,000 of cost to figure his special depreciation allowance of $40,000 ($80,000 × 50%). He uses the remaining $40,000 of cost to figure his regular MACRS depreciation deduction for 2007 and later years.
You can elect, for any class of property, not to deduct any special allowances for all property in such class placed in service during the tax year.
To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election.
If you elect not to have any special allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation.
When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. See When Do You Recapture MACRS Depreciation in chapter 4 for more information.
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