Federal Individual Taxation: Form 1040 Schedule E and Depreciation

This assignment provides a solution for Form 1040 Schedule E, focusing on depreciation and its application in real estate. It covers the Modified Accelerated Cost Recovery System (MACRS) and its role in determining depreciation schedules for residential real estate and other assets. The assignment explains the Straight Line Method with a useful life expectancy of 27.5 years for residential properties, and 7 years for fixtures and equipment. Additionally, it clarifies that Section 179 does not apply to properties held for investment, providing a clear understanding of the relevant tax regulations and their practical application. The document also includes an analysis of the depreciation of the properties.

FEDERAL INDIVIDUAL TAXATION
To complete this task of filing Form 1040 Schedule E on behalf of my clients Brian and Sheila
Williams, I have used the following definitions and followed the system prescribed under them.
Since Brian and Sheila Williams are not in the business of renting personal property, they are not
required to file Form-1040 Schedule C or C-EZ.
Depreciation
Depreciation is an annual deduction which my clients can use for recovering the costs, over a
certain number of years, related to their investment properties. Depreciation started when my
clients first used the properties for producing income. It shall end when they either take these
properties out of service, or have recovered all their depreciable costs, or stop using these
properties for producing income. As per the law, a taxpayer can depreciate Tangible Property
owned by them and include building, vehicle, machinery, furniture and equipment. An exception
is that the taxpayer cannot depreciate land.
Modified Accelerated Cost Recovery System
Under the current tax code, the Modified Accelerated Cost Recovery System (MACRS) is used
for determining an asset’s depreciation. All assets are classified into classes under MACRS and
these define the number of years during which the asset's cost can be recovered. A predetermined
schedule determines the percentage of each asset's costs under each MACRS class which can be
depreciated each year. My clients own Residential Real Estate properties and these can be
depreciated using the Straight Line Method with Useful Life Expectancy of 27.5 years. Fixtures
and Equipment are allowed Useful Life Expectancy of 7 Years.
Section 179 Property
Since my clients are not in the trade of renting properties for trade or business, the properties
acquired by them are not covered under Section 179. Section 179 property does not include any
property held for investment (section 212 property).