Section 167

Section 167 in Detail

Section 167 of the Internal Revenue Code (IRC) governs the depreciation deductions on property, including real estate. Depreciation is a tax deduction that an investor or business can utilize to recover the cost or other basis of certain property that wears out, gets used up, or becomes obsolete over time. This tax allowance plays a significant role in financial planning and tax strategies for real estate and business owners.

Key Aspects of Section 167:

• Depreciation Allowance: The code specifies how much an asset can be depreciated annually, and over how many years, depending on the nature of the asset.
• Type of Assets: Depreciation applies to both tangible and intangible assets including buildings, machinery, and improvements to real property.
• Improvements and Additions: Made to property that extends its life, increases its value, or adapts it to a new use can also be depreciated over the useful life.
• Eligibility: Property must be used in business or held to produce income to qualify for depreciation.

Examples

1. Residential Rental Property: A rental building that is used for residential purposes can be depreciated over a period of 27.5 years as per the Modified Accelerated Cost Recovery System (MACRS).
2. Commercial Building Improvement: If a business spends $50,000 on improving its commercial office space by adding walls or upgrading systems, this amount will be depreciated according to the dictated schedule for commercial properties, typically over 39 years.
3. Machinery and Equipment: An industrial machine used in a manufacturing plant can also be depreciated as per Section 167, based on its useful life and wear and tear included in the schedule.

Frequently Asked Questions

What qualifies for depreciation under Section 167?

Property used in a business or held for the production of income that has a determinable useful life of more than one year qualifies for depreciation under Section 167.

How is depreciation calculated?

Depreciation is calculated using several methods, with the most common being the Modified Accelerated Cost Recovery System (MACRS). It involves dividing the cost or other basis of the property by the years over which it will be depreciated.

Does land qualify for depreciation?

Land is not depreciable. Depreciation applies only to the buildings and improvements on the land.

Can you depreciate improvements made to leased property?

Yes, improvements made to leased property can be depreciated over their useful life as specified in the code.

Can depreciation deductions be claimed for personal use property?

No, depreciation deductions are not allowable for property used purely for personal purposes.

Related Terms

• Depreciation: A reduction in the value of an asset over time, due especially to wear and tear.
• Capital Improvements: Enhancements that add value to a property, extend its useful life or adapt it to new uses, which can be depreciated.
• Modified Accelerated Cost Recovery System (MACRS): A method of depreciation for tax purposes that spreads costs and expenses across the useful life of an asset.
• Internal Revenue Code (IRC): The body of laws regulating federal tax law in the United States.
• Straight-Line Depreciation: A method of depreciating an asset in which an equal amount is deducted every year over the asset’s useful life.

Online Resources

1. IRS - Depreciation: IRS Website
   • Offers various resources related to depreciation, including detailed publications and tax forms.
2. Investopedia - Depreciation: Investopedia
   • Provides comprehensive explanations and examples related to depreciation.
3. IRS - Publication 946: Publication 946, How to Depreciate Property
   • An IRS publication explaining the guidelines for depreciating property used in business or for income production.

References

1. Murray, J. (2018). Tax Depreciation Methods. Atlantic Publishing Group.
2. IRS. “Publication 946: How to Depreciate Property.” Internal Revenue Service, 2023.
3. Kramer, J. K. (2014). Real Estate Investment Strategies: Practical Tips for Investment Success. Wiley.

Suggested Books for Further Study

1. “Depreciation and Other Catch-Up Allowances” by Stephen Fishman J.D. Covers detailed aspects of depreciation, including cases and practical applications.
2. “The Real Estate Investor’s Tax Guide” by Vernon Heaton A guide offering insights on tax strategies including depreciation for real estate investors.
3. “Practical Guide to Real Estate Taxation” by David F. Windish Comprehensive guide on real estate taxation, with detailed sections on depreciation laws and regulations.

Real Estate Basics: Section 167 Fundamentals Quiz