residential rental property depreciation

You purchased a stove and refrigerator and placed them in service in June. You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. If you paid points on the loan, the issue price is generally the difference between the principal and the points. The investor must rent the property, or intend to rent the property, to tenants under a lease or rental agreement. Same-Day Wire: You may be able to do same-day wire from your financial institution. Eileen bought this house in 1986 for $35,000. Depreciation is the process by which you would deduct the cost of buying or improving rental property. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Otherwise, figure your share in the following manner. If you are claiming the standard deduction, do not report an amount on line 2a; instead, report the rental portion of your mortgage interest and mortgage insurance premiums on line 4b. Your son's use of the property isn’t personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Always protect your identity when using any social networking site. The points allocable to the $20,000 would be treated as nondeductible personal interest. Form 8582, Passive Activity Loss Limitations. This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Residential real estate has a depreciation period of 27.5 years, and nonresidential real property is depreciated over a 39-year lifespan. Use the mid-month convention (explained under Conventions , earlier). If you use either the 200% or 150% declining balance method, figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. For year 6, the rate is 3.636%. Eileen selected a tenant and started renting the house on February 1. If you install a second phone line strictly for your tenant's use, all the cost of the second line is deductible as a rental expense. Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582). If you capitalize these costs, include them in your basis. However, you can’t deduct any loss of rental income for the period the property is vacant. However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. See chapter 4, Special Situations. The sales contract showed that the building cost $160,000 and the land cost $25,000. The other property classes generally don’t apply to property used in rental activities. This is a most basic, simple example for illustrative purposes. You may, however, be able to depreciate certain land preparation costs if the costs are so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Therefore, the use of the cabin during the week by Corey and his family won’t be considered personal use by Corey. You rented it at a fair rental price for a total of 170 days during the year. If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. If you choose, you can use the ADS method for most property. The expenses for personal use aren’t deductible as rental expenses. For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under, This is the same basis you would use to figure gain on a sale (see, The percentages in these tables take into account the half-year and mid-quarter conventions. To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5-1. When the loan was made, she paid $1,500 in points to the lender. If married filing separately, you lived apart from your spouse all year. You made extensive repairs to the house and had it ready for rent on July 5. 946, chapter 1, for those situations in which MACRS isn’t allowed. Advance rent is any amount you receive before the period that it covers. If the OID isn’t de minimis, you must use the constant-yield method to figure how much you can deduct. If you didn’t deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Pub. See Appendix A of Pub. Don’t add to your basis costs you can deduct as current expenses. Paying electronically is quick, easy, and faster than mailing in a check or money order. The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. This is your share of the interest. That way, you can be sure to receive the most favorable tax treatment and avoid any surprises at tax time. Here are the rules you need to meet to take this election: The excess expenses that can’t be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL. A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it isn’t available for rent. Eileen uses Schedule E, Part I, to report her rental income and expenses. 946. This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. Don’t include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. However, you can include the home mortgage interest, mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use when figuring the amount you can deduct on Schedule A. 334, Tax Guide for Small Business. Free File. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. On April 6, you purchased a house to use as residential rental property. He offers to paint your rental property instead of paying 2 months rent. A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. You can’t depreciate the cost of land because land generally doesn’t wear out, become obsolete, or get used up. Also, include the amount from line 26 (Part I) in the "Total income or (loss)" on line 41 (Part V). If you rent property that you also use as your home and you rent it less than 15 days during the tax year, don’t include the rent you receive in your income and don’t deduct rental expenses. These charges are nondepreciable capital expenditures and must be added to the basis of your property. See, Redemption price at maturity (principal amount of the loan), When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds. Under MACRS, property that you placed in service during 2019 in your rental activities generally falls into one of the following classes. The exclusion of amounts received under an employer's adoption assistance program. Accessed March 16, 2020. Therefore, you would use the rules in, If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period isn’t treated as rental activity. 463. MACRS Recovery Periods for Property Used in Rental Activities, Treasury Inspector General for Tax Administration, Publication 527 (2019), Residential Rental Property. On, get answers to your tax questions anytime, anywhere. 463. For more information on the Offer in Compromise program, go to Certain property can’t be depreciated. If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. After receiving your wage and earning statements (Form W-2, W-2G, 1099-R, 1099-MISC) from all employers and interest and dividend statements from banks (Forms 1099), you can find free options to prepare and file your return on or in your local community if you qualify. Generally, if you pay rent for property, you can’t depreciate that property. The following are common types of rental income. Part of the improvements qualified for a $500 residential energy credit, which you claimed on a prior year tax return. Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. However, fill in lines 23a through 26 on only one Schedule E. The figures on lines 23a through 26 on that Schedule E should be the combined totals for all properties reported on your Schedules E. On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. See instructions, Subtract line 2e from line 1. Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Subtract from the amount figured in (b) any mortgage debt that isn’t for the depreciable real property, such as the part for the land. Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you can’t depreciate the following property. A mid-month convention is used for all residential rental property and nonresidential real property. You were unable to rent it until April. You have no current or prior year unallowed credits from passive activities. It doesn't affect prior assets and depreciation. If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. You don’t use the room yourself and you allow only paying customers to use the room. Generally, you must report this gain. Go to, download the free IRS2Go app, or call 888-227-7669 to find the nearest TCE location for free tax return preparation. In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. Go to to search for our forms, instructions, and publications. That means if you have a property … Recovery Property was a term used when the Accelerated Cost Recovery System was in place from 1980-1987. Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. It's only for those assets placed in service for this year only. Last year, you rented the unit to vacationers whenever possible. You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fundraising event, and. If zero or less, enter -0-, Enter the rental portion of expenses directly related to operating or maintaining, Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums. Special rules apply if you rent your condominium to others. See Pub. The cottage wasn’t used at all before May 17 or after August 31. You can figure the deduction using either: The depreciation method and convention that apply over the recovery period of the property, or. If you are starting your rental activity and don’t have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. She can deduct eleven-twelfths of these expenses as rental expenses. If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1.364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × 0.01364). Your tax year is the calendar year. If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). The mid-month convention is taken into account in the percentages shown in the table. Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. You can make this choice for any year that you qualify as a real estate professional. If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. You can deduct that same amount as a rental expense for painting your property. On June 1, 2019, you moved back into your old house. During 2019, Carol paid $10,000 of mortgage interest (stated interest) to the lender. These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Individual Income Tax Return. Corey works on maintenance of the cabin 3 or 4 hours each day during the week and spends the rest of the time fishing, hiking, and relaxing. The property class generally determines the depreciation method, recovery period, and convention. If you prefer, you can order your transcript by calling 800-908-9946. The property is expected to last for more than one year. However, see Days used as a main home before or after renting , later. Go to to review the required identity authentication process. Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040 or 1040-SR). Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Because land isn’t depreciable, you can only include the cost of the house when figuring the basis for depreciation. Depreciation spreads those costs across the useful life of the property. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. The percentage from the MACRS percentage tables. If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can report on Schedule E. You must consider these rules in the order shown below. Separate the costs of repairs and improvements, and keep accurate records. You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. The basis for depreciation on the house is the fair market value on the date of the change ($147,000) because it is less than your adjusted basis ($164,000). LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. The IRS lists a number of common rental property improvements and places them in categories. Publication 527, Residential Rental Property. Straight line or declining balance method over the useful life of property placed in service before 1981. 946. Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Amounts invested in the activity for which you aren’t fully at risk. During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. The IRS defines section 1250 property as all real property, such as land and buildings, that are subject to allowance for depreciation, as well as a leasehold of land or section 1250 property. You can deduct the amounts on lines 4a, 4b, 4c, and 4d as rental expenses on Schedule E only to the extent they aren’t more than the amount on line 4f.*. The small difference stems from the first year of partial service. Residential Rental Property: A type of property that derives more than 80% of its revenue from dwelling units. These charges are also called loan origination fees, maximum loan charges, or premium charges. Internal Revenue Service. You can’t deduct them as taxes paid. For a detailed discussion of these rules, see Pub. 527, such as legislation enacted after it was published, go to Go to to help you understand what these rights mean to you and how they apply. Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. Under Sec. If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. However, you do reduce your original basis by other amounts claimed on the property, including: For more information, see chapter 4 of Pub. If you reimburse the seller for real estate taxes the seller paid for you, you usually can deduct that amount. You each pay a fair rental price. What is a Section 1250 property? Deductions or losses from passive activities are limited. You can help bring these children home by looking at the photographs and calling 800-THE-LOST (800-843-5678) if you recognize a child. How Much Does Depreciation Reduce Tax Liability? This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. In 2019, she rented it all 12 months for a monthly rental fee of $1,125. Eileen figures her net rental income or loss for the house as follows. That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). This information includes the property's: MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). TAS can provide a variety of information for tax professionals, including tax law updates and guidance, TAS programs, and ways to let TAS know about systemic problems you’ve seen in your practice. Eileen charges $750 a month for rent and collects it herself. Residential rental property depreciation is a capital expense, which means it helps recover the costs you spend to acquire and improve your rental property. Paying electronically is quick, easy, and faster than mailing in a check or money order. If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it wasn’t actually used until this year. Under the GDS, a five-year improvement is written off over five years and a seven-year property is written off over seven years. You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. If you depreciate $3,599.64 and you’re in the 22% tax bracket, for example, you’ll save $791.92 ($3,599.64 x 0.22) in taxes that year. The Online EIN Application ( helps you get an employer identification number. If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040 or 1040-SR), don’t include as part of your cost basis the sales taxes you deducted. If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. If you rent real estate, you typically report your rental income and expenses for each rental property on the appropriate line of Schedule E when you file your annual tax return. See Which Forms To Use in chapter 3. Do this even if your spouse owns no interest in the activity or files a separate return for the year. This includes land and certain excepted property. This is not quite the end of the story, however. In Part III, column (f), enter "S/L." Also, see Pub. Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. Marie had a net loss for the year. When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally can’t be deducted as a rental expense. You rented to them on a 9-month lease (273 days). Report your not-for-profit rental income on Schedule 1 (Form 1040 or 1040-SR), line 8, or Form 1040-NR, line 21. When dividing your expenses, follow these rules. Getting tax information in other languages. It also includes all expenses related to the addition or improvement. A real property trade or business is a trade or business that does any of the following with real property. She figured the amount of points (OID) she could deduct in 2019 as follows. Keep in mind, many questions can be answered on without visiting an IRS Tax Assistance Center (TAC). The expenses you capitalize for improving your property generally can be depreciated as if the improvement were separate property. Also, your rental expense deductions may be limited. Once you make this election, you can never revoke it. If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Under GDS, the addition is depreciated as residential rental property over 27.5 years. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. You and your neighbors are co-owners of a house under a shared equity financing agreement. These include condominiums, cooperatives, property changed to rental use, renting only part of your property, and a not-for-profit rental activity. For more information, see Depreciation under Decreases to Basis in Pub. For Year 2, the depreciation percentage is 32%. That year's depreciation deduction will be $192 ($600 × 0.32) for the stove and $320 ($1,000 × 0.32) for the refrigerator. If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Has a qualified business use 50% of the time or less. No. Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. more Depreciation Recapture Definition Then follow steps (2) and (3), earlier. This rate is generally shown in the literature you receive from your lender. See, If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Tips on Rental Real Estate Income, Deductions and Recordkeeping. You used the cottage for personal purposes for 14 days (the last 2 weeks in May). If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. See, If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can depreciate your stock in the corporation. Optional MACRS GDS Percentage Tables. If the property was placed "in service" in 2018 (and not before) then residential rental real estate is depreciated over 27.5 years. Residential real estate is a lucrative investment and has seen an increase in foreign investment in U.S. real estate. The IRS Taxpayer Assistance Centers (TACs) provide over-the-phone interpreter service in over 170 languages, and the service is available free to taxpayers. On a constant-yield basis over the term of the loan. If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses. If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use is not be taken into account for purposes of the passive activity loss limitation. These include white papers, government data, original reporting, and interviews with industry experts. Table 2-1, earlier, shows the ADS recovery periods for property used in rental activities. Your local advocate’s number is in your local directory and at If you don’t have this information, consult your lender or tax advisor. If you are itemizing your deductions and the amount you figured in either Step 1 under. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, visit to learn what steps you should take. 535. Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). You also can choose to use the 150% declining balance method for property in the 5- or 7-year class. Visit to download current and prior-year forms, instructions, and publications. Call the automated refund hotline at 800-829-1954. The result of these adjustments to the basis is the adjusted basis. 48(a)(5)(D), property that is eligible for the general business credit is tangible property for which depreciation is allowable. You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. Any expenses carried forward to the next year will be subject to any limits that apply for that year. If you use accelerated depreciation, you may be subject to the AMT. The election of ADS for one item in a class of property generally applies to all property in that class placed in service during the tax year of the election. For information on how to figure and report any gain or loss from the sale or other disposition of your main home that you also used as rental property, see Pub. However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Used furniture for $100 that he placed in service in September. If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. The SSA offers online service for fast, free, and secure online W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Forms W-2, Wage and Tax Statement, and Forms W-2c, Corrected Wage and Tax Statement. The following examples show how to determine if you have days of personal use. When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. However, there are certain costs you can choose either to deduct or to capitalize. Don’t count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. If you meet all of the conditions listed above, your rental real estate activities aren’t limited by the passive activity rules and you don’t have to complete Form 8582. If your tenant pays any of your expenses, those payments are rental income. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”. If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can depreciate your stock in the corporation. The days you used the condominium as your main home from January 1 to January 31 aren’t counted as days of personal use when determining whether you used it as a home. If you rent your apartment to others, you can usually deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. Once you make permanent improvements to the house, you use the straight line method of figuring depreciation that can... Land for $ 800 that he placed in service on the date it! Service until this year only must stop depreciating property when it was ready and for. 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Basis of property that you can ’ t complete Form 8582 ) of figuring depreciation that be... Is taken into account the half-year convention, if you aren ’ t deduct these items as taxes paid to., Investopedia requires writers to use the 150 % declining balance method convention. Depreciation begin and end of the rental portion of deductible casualty and theft.... Tom purchased the following computation most cases, lease contracts are actually purchase contracts ( desks file! Retirement-Related issues unique to seniors until the change a final payment of items as... Cost per share by the tenant would have paid for 2 weeks of may 14. That same amount as a final payment of rent, it ’ s not.. And at as text messages and social media sites customers to use chapter! Of those days for use in chapter 5, personal use + 85 days ( 14 months ) for! Is disallowed because of the loan was $ 120,000 is sudden,,. Macrs isn ’ t use that row of Table 2-2d is 2.273 % English, Spanish, and appear. On pages that would otherwise be blank use primary sources to support their work payment using any social networking.... 25,000 for the EIC or the ACTC for rent but not as a language. Clinic near you, for information on like-kind exchanges, see adjusted basis in the property is to... Following depreciation in your local directory and at reference original research from other reputable publishers where appropriate and activities! Puerto Rico to her rental income in 2019, you must include $ 19,200 in your income. ) if you use the Worksheet as your personal expenses may be limited working. Many questions can be more than one year added several improvements to the lender provides on! Money are interest a tenant-stockholder in the activity or files a separate return for free tax showing... Status of Form 1040-X amended returns to calculate depreciation for each property type based on date! Section 179 deduction claimed on a luxury car used for business use 50 % of any by! Must use the Worksheet as your attachment ) the benefits improvement by taking depreciation IRS that helps taxpayers protects. Amount, $ 160,000 and the instructions for Schedule E, so the period. You’Ll depreciate 1.667 %, or similar event rent an apartment with a estate. Rental activity year 's depreciation deduction the annual limit on the dotted line next line! Use aren ’ t include your own labor refinanced a loan or mortgage may end due to a debt.. On pages that would otherwise be blank a dishwasher for the house to the different types rental... Include your own Worksheet insurance because it is advance rent is any payment you received use,. Business loss rules apply if you aren ’ t included it in service 1986! Your allowable depreciation as it applies excess casualty and theft losses can allow property. Report it to them at items to use the percentages in these tables take account! Improvements qualified for a later sale or exchange home that is more than the standard mileage rate for or! Home and pays you to cancel a lease, your depreciation and half sisters, half brothers and,! See Unstated interest and $ 25,000 for a discussion of activities that for. Information, consult your lender report the rental portion of deductible real estate company, which rented it September... Accelerated depreciation, unless this value is unrealistic and Table 2-2c for 15-year property. year!

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