Property You Own

To claim depreciation, you must usually 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.

Leased property. You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). This means you bear the burden of exhaustion of the capital investment in the property. Therefore, if you lease property from someone to use in your trade or business or for the production of income, generally you cannot depreciate its cost because you do not retain the incidents of ownership. You can, however, depreciate any capital improvements you make to the property. See How Do You Treat Repairs and Improvements , later in this chapter, and Additions and Improvements under Which Recovery Period Applies? in chapter 4.

If you lease property to someone, you can generally de- preciate its cost even if the lessee (the person leasing

Publication 946 (2025) Chapter 1 Overview of Depreciation 3

from you) has agreed to preserve, replace, renew, and maintain the property. However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property.

Incidents of ownership. Incidents of ownership in property include the following.

• The legal title to the property.

• The legal obligation to pay for the property.

• The responsibility to pay maintenance and operating expenses.

• The duty to pay any taxes on the property.

• The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion.

Life tenant. Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. However, see Certain term interests in property under Excepted Prop- erty, later.

Cooperative apartments. If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment.

Figure your depreciation deduction as follows.

1. Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows.

a. Multiply your cost per share by the total number of

outstanding shares, including any shares held by the corporation.

b. Add to the amount figured in (a) any mortgage

debt on the property on the date you bought the stock.

c. Subtract from the amount figured in (b) any mort gage debt that is not for the depreciable real property, such as the part for the land.

2. Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders.

3. Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation.

4. Multiply the result of (2) by the percentage you figured in (3). This is your depreciation on the stock.

Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or

income-producing property. You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income.

Example. You figure your share of the cooperative housing corporation’s depreciation to be $30,000. Your adjusted basis in the stock of the corporation is $50,000. You use one-half of your apartment solely for business purposes. Your depreciation deduction for the stock for the year cannot be more than $25,000 ( ¹ /2 of $50,000).

Change to business use. If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts.

• The FMV of the property on the date you change your apartment to business use. This is considered to be the same as the corporation’s adjusted basis minus straight line depreciation, unless this value is unrealistic.

• The corporation’s adjusted basis in the property on that date. Do not subtract depreciation when figuring the corporation’s adjusted basis.

If you bought the stock after its first offering, the corporation’s adjusted basis in the property is the amount figured in (1) under Cooperative apartments , earlier. The FMV of the property is considered to be the same as the corporation’s adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic.

For a discussion of FMV and adjusted basis, see Pub. 551.