Hi everyone, How do I treat the following: I purchased a triplex. I have a contrator fix up each unit for $10,000. This payment includes, the stove, furnace, oven, and water tank. How is this handled tax wise? Do I list each item seperately and depreciate over the allowable time? Thanks for your input and great discussions on this site, Liz in Albuquerque
Are all these appliances new, or merely "upgraded"?
If new, I would treat the furnace and (hot?) water heater as capital improvements, and the stove and oven as current expenses.
Why are the stove and oven current expenses, if new?
All might be 5 year property.
How about emergency repairs to meet habitability requirements for all - and take all costs the year incurred.
"Mike" wrote
If it was in that bad of shape, it would be a major improvement. Capitalize and depreciate.
It doesn't matter whether the repairs are for an emergency or not. If it's a repair is deductible now in full as an expense, and if it's a capital improvement it has to be depreciated over a number of years and depreciation recaptured at 25% when the property is disposed off, or when you terminate your rental activity -- although you'll likely have a capital loss to offset the depreciation. Of course, I think section 179 and bonus depreciation apply to all of the items you listed (stove, oven, furnace, water heater), but would need to double check, so if you have sufficient income for the year you can write them off all at once. Publication 527 talks about "repair versus capital improvement", or you can just google for it.
You haven't said if the stove, etc are new replacements for old property you had there. If yes, you have to file forms to record the disposing of the old property.
yes, everything is new in the apartments since I would have not been able to rent them. The appliances and other items were so old that they would have created a hazzard to the tenants due to the age and impropper installments. This is a complete remodeling including new electric boxes, water, and gaslines. Thanks for all you responses, Liz
More precisely, unrecaptured §1250 gain is taxed at the lower of 25% or your regular tax rate.
-Mark Bole
Is there not an exemption for depreciation recapture (on rental property or improvements) taken during the 90s or earlier????
Your rental apartment needs a stove.
The stove store has a broken stove which it sells to you for $400; you install it, then hire a repairman to repair it for $600. You now have a capital improvement of $400, and an immediately deductible repair expense of $600.
The store hires the same repairman to repair the stove for the same $600, then sells it to you for $1000. You now have a capital improvement of $1000, and no immediately deductible repair expense.
Right?
A complete remodel would mean capitalizing the items. They may be listed by category to use the appropriate life for each category.
Note however that Section 179 does NOT apply to any of these items because it is rental property. I mention this because one of the earlier posters mentioned using Section 179 expense election.
You're right. Publication 527 says
Section 179 deduction. The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. This deduction is not allowed for property used in connection with residential rental property. See chapter 2 of Publication 946.
Is bonus depreciation allowed? I searched for keywords in publication
527.2 and 946.3 but didn't find anything saying it is not allowed, but then again I could have missed something.
I think repairs performed before the asset was placed in service are still capitalized. I can't see how it was placed in service while it was still broken.
-Mark Bole
One burner was still working (feebly) when the stove was installed and put in service. The tenant was able to make tea for a month or so, before the other burners and the oven were repaired. :-)
Placed in service?
A tenant trashes a place and repairs need to be made before it can even be shown to a new tenant.
To me it has remained in service????
Yes. By the current owner.
Sure: that apartment was in service (rented to the bad tenant), and repaired before rented to the new tenant.
But in the earlier case, the stove was _never_ in service by its current owner until after repair.
(Now suppose the stove had broken, so the owner replace it and installed a new one. That gave out, so the owner tossed it, moved the old broken one back, and had it repaired. It could be argued that it was returned to service, not placed in service.)
Seth
Makes sense, but where is this rule?
Costs incurred to ready a depreciable asset for service are part of the acquisition cost of that asset. The cost is part of the depreciable base and is recovered (deducted) over the statutory life of that asset.
Anyone who doesn't believe that is the rule should review, in detail, all the rules related to basis and cost recovery.
NOT QUITE - the stove isn't fit to use as is. All the costs of acquisition, repair, delivery and installation all get capitalized.
Right!
Example 3 might be - you spend $1,000 to fix the broken stove that is already in place. Now (maybe) you have a $1,000 repair expense.
Gene E. Utterback, EA, RFC, ABA
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