For residential rental real estate, what's the test for determining whether an asset is depreciated over 27.5yrs as part of the structure vs. depreciated as a "standalone" asset?
For example, I'd expect a refrigerator to be depreciable as a standalone asset. But what about a built-in bookcase? New kitchen cabinets? A door? A window? A toilet? A furnace? A new wood floor? Etc.
Wouldn't many of these things be repairs/maintenance as opposed to capital assets in the first place?
Steve
See Chapter 2 of IRS Pub 527. It explains which items are outside of the
27.5 years and provides you the class life. I have always treated all the items you mention other than the refrigerator as part of the building structure and therefore 27.5 year life. A free standing bookcase would be included in the furniture class life of 5 years.
If you can separately identify and quantify the individual items - like the fridge, stove, microwave, HVAC, etc. you can list them separately and use the appropriate lives for those items.
For built-in items it gets a little harder. Essentially, if the item has become a "permanent" part of the structure it gets treated like the structure, though it may come into play later and have a different start date. For example, if you add on a room to a rental 12 years after you started renting the house, the room it 27.5 year property with a different start date.
Permanency may seem like an easy call, but it gets tough some times. Can the built in bookcase be easily removed without requiring renovation work? If so it MIGHT fly as a separate item or it may not. A good example is a microwave over the stove or a dishwasher - both of these are "attached" to the house, they're bolted and wired in. BUT they are made to be easily removed so they can be replaced as necessary so there's usually little argument that these can be listed and treated separately. The same for the HVAC system. And carpeting - its application is such that it can be easily removed and replaced so you can list it separately.
And there are engineering companies that will co an assessment of other systems - lighting and HVAC for example - so that you can segregate them and claim them separately. Though in practicality this is approach is generally only cost effective for large commercial buildings - but is done.
One posted asked whether these items would be considered repairs, which raises another set of possible issues and questions. If this is the first time the property is being placed in service they would NOT be repairs. If the property was in service and you've replaced something that is attached, or mainly attached, to the house then you may have to consider other factors.
For example, if you did NOT segregate the carpeting as a separate item when you placed the house in service as a rental, new carpet MIGHT qualify as a repair. It might not too, especially if you did a significant upgrade to the carpet. For appliances like the fridge, dishwasher, microwave, HVAC system replacements are usually considered to be new items, whether they were segregated at the beginning or not, and are depreciated separately.
Gene E. Utterback, EA, RFC, ABA
Thanks, that was my question.
I was specifically referring to the following items the OP asked about: kitchen cabinets, a door, a window, a toilet, a furnace, a wood floor. It *seems* to me if these items are replaced, if they are not upgraded (e.g. the replacement is of the same grade as the original, which simply wore out), if the replacements are not part of new construction that increases the square footage of the building, then they look like repairs and not capital spending.
As you state they have to not have been separately listed to begin with for these to be repairs.
Steve
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