Table of Contents
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The definition of ACRS
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What can and cannot be depreciated under ACRS
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How to figure the deduction
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Dispositions
Publication
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544 Sales and Other Dispositions of Assets
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551 Basis of Assets
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583 Starting a Business and Keeping Records
Form (and Instructions)
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3115 Application for Change in Accounting Method
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4562 Depreciation and Amortization
The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. If you placed property in service during this period, you must continue to figure your depreciation under ACRS.
If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. Listed property includes cars, other means of transportation, and certain computers.
Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc.), are depreciated using MACRS, discussed in chapter 3 of Publication 946. It does not matter that the underlying property is depreciated under ACRS or one of the other methods.
ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. The alternate ACRS method used a recovery percentage based on a modified straight line method. The law prescribes fixed percentages to be uses for each class of property.
Property depreciable under ACRS is called recovery property. The recovery class of property determines the recovery period. Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class.
Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property.
You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946.
ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. It includes new or used and real or personal property. The property must be for use in a trade or business or for the production of income. Property you acquired before 1981 or after 1986 is not ACRS recovery property. For information on depreciating property acquired before 1981, see chapter 2. For information on depreciating property acquired after 1986, see chapter 3 of Publication 946.
Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income.
You cannot use ACRS for property you placed in service before 1981 or after 1986. Nonrecovery property also includes:
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Intangible property,
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Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years,
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Certain public utility property, and
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Certain property acquired and excluded from ACRS because of the antichurning rules.
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If you made an irrevocable election to exclude such property, and
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In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method).
After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. Because the conventions are built into the percentage table rates, you only need to know the following:
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The unadjusted basis of your recovery property,
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The classes of recovery property,
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The recovery periods, and
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Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method.
To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946.
If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. See Publication 551.
All recovery property under ACRS is in one of the following classes. The class for your property was determined when you began to depreciate it.
3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. Race horses over 2 years old when placed in service are 3-year property. Any other horses over 12 years old when you placed them in service are also included in the 3-year property class.
The ACRS percentages for 3-year recovery property are:
Recovery Period | Percentage | |
1st year | 25% | |
2nd year | 38% | |
3rd year | 37% |
If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. You cannot claim depreciation for this property after 1988.
5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components).
The ACRS percentages for 5-year recovery property are:
Recovery period | Percentage | |
1st year | 15% | |
2nd year | 22% | |
3rd through 5th year | 21% |
If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. You cannot claim depreciation for this property after 1990.
10-year property includes certain real property such as theme-park structures and certain public utility property. Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property.
You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property.
The ACRS percentages for 10-year recovery property are:
Recovery Period | Percentage | |
1st year | 8% | |
2nd year | 14% | |
3rd year | 12% | |
4th through 6th year | 10% | |
7th through 10th year | 9% |
If you used the percentages above, you cannot claim depreciation for this property after 1995.
Example.
On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Your ACRS deduction was $3,000 (8% × $37,500). In 1987, your ACRS deduction was $5,250 (14% × $37,500). In 1988, your ACRS deduction was $4,500 (12% × $37,500). In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500).
15-year real property is real property that is recovery property placed in service before March 16, 1984. It includes all real property, such as buildings, other than that designated as 5-year or 10-year property.
Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. You could group 15-year real property by month and year placed in service.
In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year.
Example.
On March 5, 1984, you placed an apartment building in service in your business. It is 15-year real property. After subtracting the value of the land, your unadjusted basis in the building is $250,000. You use the calendar year as your tax year. March is the third month of your tax year. Your ACRS deduction for 1984 was $25,000 (10% × $250,000). For 1985, the percentage for the third month of the second year of the recovery period is 11%. Your deduction was $27,500 (11% × $250,000). For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. For 1989 through 1992, the percentage for the third month is 6%. Your deduction each year is $15,000 (6% × $250,000). For 1993, 1994, and 1995, the percentage for the third month is 5%. Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995.
Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property:
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Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws.
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Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed.
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Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families.
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Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949.
The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Use the percentages listed under that month for each year of the recovery period. Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987.
Example.
In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. You use the calendar year as your tax year. You use Table C–3 because the property was placed in service after May 8, 1985. Your unadjusted basis for the property, not including the land, was $59,000.
Your deduction for 1986 through 2001 is shown in the following table.
Year | Rate | Deduction |
1986 | 8.9% | $5,251 |
1987 | 12.1% | 7,139 |
1988 | 10.5% | 6,195 |
1989 | 9.1% | 5,369 |
1990 | 7.9% | 4,661 |
1991 | 6.9% | 4,071 |
1992 | 5.9% | 3,481 |
1993 | 5.2% | 3,068 |
1994 | 4.6% | 2,714 |
1995 | 4.6% | 2,714 |
1996 | 4.6% | 2,714 |
1997 | 4.6% | 2,714 |
1998 | 4.6% | 2,714 |
1999 | 4.5% | 2,655 |
2000 | 4.5% | 2,655 |
2001 | 1.5% | 885 |
18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing.
The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. There are also tables for 18-year real property in the Appendix. Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984.
Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. Use the percentages listed under that month for each year of the recovery period.
Example.
On April 28, 1985, you bought and placed in service a rental house. The house, not including the land, cost $95,000. This is your unadjusted basis for the house. You use the calendar year as your tax year. Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. You use Table 4 to figure your deduction for the house. April is the fourth month of your tax year. Your deduction for 1985 through 2003 is shown in the following table.
Year | Rate | Deduction |
1985 | 7.0% | $6,650 |
1986 | 9.0% | 8,550 |
1987 | 8.0% | 7,600 |
1988 | 7.0% | 6,650 |
1989 | 7.0% | 6,650 |
1990 | 6.0% | 5,700 |
1991 | 5.0% | 4,750 |
1992 | 5.0% | 4,750 |
1993 | 5.0% | 4,750 |
1994 | 5.0% | 4,750 |
1995 | 5.0% | 4,750 |
1996 | 5.0% | 4,750 |
1997 | 5.0% | 4,750 |
1998 | 4.0% | 3,800 |
1999 | 4.0% | 3,800 |
2000 | 4.0% | 3,800 |
2001 | 4.0% | 3,800 |
2002 | 4.0% | 3,800 |
2003 | 1.0% | 950 |
19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing.
The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. Table 6 shows the percentages for 19-year real property.
You find the month in your tax year that you placed the property in service. You use the percentages listed under that month for each year of the recovery period.
Each item of recovery property is assigned to a class of property. The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. The classes of property are:
3-Year property |
5-Year property |
10-Year property |
15-Year real property |
Low-income housing |
18-Year real property |
19-Year real property |
ACRS provides an alternate ACRS method that could be elected. This alternate ACRS method uses a recovery percentage based on a modified straight line method.
This alternate ACRS method generally uses percentages other than those from the tables. If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. This schedule is for other than 18- and 19-year real property and low-income housing:
In the case of: | You could have elected
a recovery period of: |
|
3-year property | 3, 5, or 12 years | |
5-year property | 5, 12, or 25 years | |
15-year real property | 15, 35, or 45 years |
Recovery Period | Percentage | |
5 years | 20.00% | |
10 years | 10.00% | |
12 years | 8.333% | |
15 years | 6.667% | |
25 years | 4.00% | |
35 years | 2.857% |
Example.
You operate a small upholstery business. On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. You elected to use the alternate ACRS method. You did not elect to take a section 179 deduction. You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. The saw is 5-year property, but you decided to recover its cost over 12 years.
For 1986, your ACRS deduction reflected the half-year convention. In the first year, you deducted half of the amount determined for a full year. Your ACRS deduction for 1986 is as follows:
Light-duty truck | ||
5 years straight line = 20%
20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= |
$1,300.00 | |
Electric saw | ||
12 years straight line = 8.333%
8.333% ÷ $500 = $41.67 Half-year convention -½ of $41.67= |
20.84 | |
Total ACRS deduction for 1986 | $1,320.84 | |
You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Your ACRS deduction for each of those years is as follows:
Light-duty truck | ||
5 years straight line = 20%
20% ÷ $13,000 = |
$2,600 | |
Electric saw | ||
12 years straight line = 8.333%
8.333% ÷ $500 = |
$41.67 | |
Total annual ACRS deduction for 1987 through 1990 | $2,641.67 | |
In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. Your ACRS deduction for 1991 is as follows:
Light-duty truck | ||
5 years straight line = 20%
20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= |
$1,300.00 | |
Electric saw | ||
12 years straight line = 8.333%
8.333% ÷ $500 = |
$41.67 | |
Total ACRS deduction for 1991 | $1,341.67 | |
The truck is fully depreciated after 1991. You take a full year of depreciation for the saw for the years 1992 through 1997. Your ACRS deduction for each of those years is as follows:
Electric saw | ||
12 years straight line = 8.333%
8.333% ÷ $500 = |
$41.67 | |
Total annual ACRS deduction for 1992 through 1997 | $41.67 | |
You take a half-year of depreciation for the saw for 1998. Your ACRS deduction for 1998 is as follows:
Electric saw | ||
12 years straight line = 8.333%
8.333% ÷ $500 = |
$41.67 | |
Half-year convention -½ of $41.67= | 20.84 | |
Total ACRS deduction for 1998 | $20.84 | |
The saw is fully depreciated after 1998.
Example.
You placed in service an apartment building on August 3, 1986. The building is 19-year real property. The sales contract allocated $300,000 to the building and $100,000 to the land. You use the calendar year as your tax year. You chose the alternate ACRS method over a recovery period of 35 years. For 1986, you figure your ACRS deduction usingTable 13. August is the eighth month of your tax year. The percentage from Table 13 for the eighth month is 1.1%. Your deduction was $3,300 ($300,000 ÷ 1.1%). The deduction rate from ACRS Table 13 for years 2 through 20 is 2.9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2.9%).
For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. Figure the amount of the ACRS deduction for a short tax year as follows:
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First, you figure the ACRS deduction for a full year. You figure this by multiplying the unadjusted basis by the recovery percentage.
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You then multiply the ACRS deduction determined for a full tax year by a fraction.
The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12).
You use the full ACRS percentages during the remaining years of the recovery period. For the first tax year after the recovery period, the unrecovered basis will be deductible.
A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction.
You generally recognize gain or loss on the disposition of an asset by sale. However, nonrecognition rules can allow you to postpone some gain. See Publication 544.
If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition.
Example.
You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). You file your return based on a calendar year. Your rate from Table 1 for the third month is 10%. Your ACRS deduction for 1984 was $9,800 ($98.000 ÷ 10%). For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. For 1989 through 1992, you figured your ACRS deductions using 6% for each year. The deduction each year was $98,000 ÷ 6%. For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. You sell the house on June 1, 1995.
You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). You then prorate this amount to the 5 months in 1995 during which it was rented. Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12).
Example.
You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). You file your return based on a calendar year. Your rate from Table 4 for the seventh month is 4%. You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. You sell the house on September 24, 1995. Figure your ACRS deduction for 1995 for the months of use. The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). Prorate this amount for the 8.5 months in 1995 that you held the property. Under the mid-month convention, you count September as half a month. Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8.5/12).
If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Section 1245 property generally includes all personal property. See Section 1245 property in chapter 4 of Publication 544 for more information.
You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Section 1250 property includes most real property. See Section 1250 property in chapter 4 of Publication 544 for more information. This rule applies to all section 1250 real property except the following property:
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Any 15-, 18-, or 19-year real property that is residential rental property.
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Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method.
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Any 15-, 18-, or 19-year real property that is subsidized low-income housing.
For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation.
See Publication 544 for further discussion of dispositions of section 1245 and 1250 property.
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