What Type of Property May You Depreciate?

Depreciation deductions may be claimed only for property used
in your business or other income producing activity.  If the primary
purpose of the property is to produce income but it fails to yield
any income, the property may still be depreciated.

When you own business property or equipment that gets worn down through
use, you can deduct a certain amount for depreciation, representing the wear
and tear for the tax year. 

Depreciation is commonly known as a "phantom" expense  because it is a
deduction that you don't actually pay for.   The kind of property that can be
depreciated on your tax return include machinery, equipment, buildings,
vehicles, and furniture.

The IRS rules are specific; to be depreciable, the property must meet all the
following requirements:

Property You Own
To claim depreciation, you must be the owner of the property.  You are
considered as owning property even if it is subject to a debt.

Example 1:  You made a down payment to purchase rental property and assumed
the previous owner's mortgage.  You own the property and you can depreciate it.

Example 2:  You bought a new van that you will use only for your courier
business.  You will be making payments on the van over the next 5 years.  You
own the van and you can depreciate it.

Property Used in Your Business or Income-Producing Activity
To claim depreciation on property, you must use it in your business or
income-producing activity.  If you use property to produce income (investment use),
the income must be taxable.  You cannot depreciate property that you use solely
for personal activities.

Partial business or investment use.  If you use property for business or
investment purposes and for personal purposes, you can deduct depreciation based
only on the business or investment use. 

Example:  You cannot deduct depreciation on a car used for commuting, personal
shopping trips, family vacations, driving children to and from school, or similar activities

Office in the home.  If you use part of your home as an office, you may be able to
deduct depreciation on that part based on its business use.  Visit our "home office depreciation"
section to learn more.

Inventory.  You cannot depreciate inventory because it is not held for use in your
business.  Inventory is any property you hold primarily for sale to customers in the
ordinary course of your business. 

Property Having a Determinable Useful Life
To be depreciable, your property must have a determinable useful life.  This means
that it must be something that wears out, decays, gets used up, becomes obsolete, or
loses its value from natural causes.

Property Lasting More Than One Year
To be depreciable, property must have a useful life that extends substantially beyond
the year you placed it in service.

Example:  You maintain a library for use in your profession.  You can depreciate it. 
However, if you buy technical books, journals, or information services for use in your
business that have a useful life of one year or less, you cannot depreciate them.  Instead,
you deduct their cost as a business expense.

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