I recently replaced the HVAC unit (condenser, coil, and furnace) in a residential rental property. Looking at the depreciation schedule, I was quite surprised to discover that this is apparently classified as
Given the basically zero chance that any residential air conditioning system will last more than 10 or 15 years, how should I handle this when I inevitably have to replace the system (or a significant component) long before it's fully depreciated?
Depending on the tax law as it may exist at that time, you will have a method for writing off the remaining basis or adjusting the basis in the replacement equipment. About the only thing I can be certain of is that the rules in this area 10 years from now won't be the same as the current rules.
Ira Smilovitz, EA
It depends if you want to follow the LAW, or the new IRS depreciation rules. If you want to follow the LAW, you will just write this off as a repair, and not depreciate it.
Wrong as to the LAW. The LAW presumes that the HVAC replacement is an improvement and should be capitalized unless you can meet one of the provisions in Reg 1.263(a)-3. There isn't enough information in the OP to determine whether this is an improvement or repair.
Ira Smilovitz, EA
What statute are you referring to?
26 USC 263 and the associated reg.
Ira Smilovitz, EA
It's essentially a whole new system. All of the major components were replaced, and it's higher capacity. So I'm reasonably certain that it's an improvement.
Take a close look at the regs. While it seems that this is an improvement, there are certain situations that may allow you to elect to treat this as a repair. You will have to include the appropriate election language with your return if you wish to do so.
Ira Smilovitz, EA
I agree. Also, is this not subject to section 179 these days?
I'm not sure. (My clientele doesn't typically have rental properties.) The new rules address building systems and components. If the HVAC system is considered a part of the building, it might not be. Otherwise, I assume it would be.
Ira Smilovitz, Ea
AFAICT, section 179 elections are not available for *residential* rental properties.
bonus depreciation?
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