I’m reading up on all that I can to prepare for my plunge into the REI world. Today, it’s “IRS Publication 527 Residential Rental Property”. Great read…(moan).
Today, I’m learning about Depreciation.
I’m OK with the 27.5 years on the building and it’s components, but 5 years on appliances and carpeting? 15 years on shrubbery?
I understand that there could be an advantage with being able to depreciated some of these things over a shorter schedule, but doesn’t it create a lot of extra paperwork to keep track of when you have different items purchased at different times being depreciated at different rates?
It would be nice if some of these things (like replacing carpeting or applicances) could just be written off as expenses. I can see where something like carpet could need to be replaced every couple of years or so. What happens if it’s replaced before the depreciation schedule is complete?
Yes it does create more paperwork. If you have apartment complexes it makes more since than single family. There are people in my real estate investor’s club that swear by it. There is a guy that does this for a living and will help you break out your components and teach you how to track it.
I had a very experienced tax professional (also worked for the IRS for awhile) doing my taxes for years now (I have many rentals) and I don’t recall ever depreciating stuff like carpeting, appliances, etc. It is always taken as an expense. In her words, the IRS is not interested in small potatoes (in their eyes) of even a couple thousand dollar expense (like carpet).
With that said, seek out your own professional tax advisor. This is where these kind folks are really great; things that you wonder and sweat over for hours and hours, they know handle in two seconds.
The publication refers to different classes of property, and the class determines the depreciation period. The 5-year class includes things like appliances, furniture, computers, and vehicles.
I agree that something like carpeting should be an “expense” because unfortunately, replacing carpeting between tenants could be as common as general clean-up. Maybe when the publication refers to carpeting as an “improvement” that needs to be depreciated, it’s referring more to the installation of completley new carpeting when none was present before, which would ADD value as opposed to “replacing”, which could be considered a “repair” to MAINTAIN the value.
The publication says that - Work you do (or have done) on your home that does not add much to either the value or the life of the property, but rather keeps the property in good condition, is considered a repair, not an improvement.
“Carpeting” is included in a table that lists “Improvements”, but like I mentioned above, if carpet was ALREADY there, wouldn’t replacement just be “maintaining” the value rather than adding to it?
The publication also states the following concerning Improvements and Repairs:
Repairs. A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs.
Improvements. An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses.
for me everything’s a repair unless it clearly improves the property AND costs lots of money.