I purchased a furnished condo this year with the intent to use it as a short term rental. I will use it zero days and rent it out the maximum days possible.
question: Can I 100% depreciate the furniture and appliances in this tax year, 2022?
Can I 100% depreciate the furniture and appliances in this tax year, 2022?
Read up on this subject in the IRS Pub 527 chapter 2 ... https://www.irs.gov/forms-pubs/about-publication-527
@Phil P wrote:Can I 100% depreciate the furniture and appliances in this tax year, 2022?
Not if you paid a bulk price for all of the furniture (which you should value separately from the condo itself).
You can depreciate the furniture and appliances using a five-year recovery period.
one issue with taking sec 179 is that there must be a profit from the rental. most rentals show losses so the 179 is not allowed and becomes a carryover.
Thank you. Sounds like depreciation over a 5 year period might be better anyway.
Things depend on if your rental activity will qualify as a "trade or business". Typically, rental income is passive and gets reported on SCH E. With SCH E rental activity the SEC 179 deduction is limited, whereas the SDA (Special Depreciation Allowance) is not limited so much.
Since rental property "typically" shows a loss "on paper" at tax filing time, there is commonly no immediate "real" tax advantage to taking either SEC179 or the the SDA.
Many newcomers to the rental game have a mistaken impression that depreciation is a permanent deduction. It is not.Depreciation has to be account for at some time. Typically and most commonly when you sell the property in the future. For example, when you sell the property in the future you are required to recapture all depreciation taken and pay taxes on it in the year you sell the property. You are also required by law to depreciate property used for the production of income. If you don't depreciate it, then when you sell the property you are required to recapture and pay taxes on the depreciation you "should" have taken. So there's no getting out of it. Several things to keep in mind about depreciation.
1) When you sell the property and recapture that depreciation, it gets added to and increased your AGI for that tax year. This has the potential (depending on the numbers) to bump you into the next higher tax bracket.
2) The increased AGI caused by depreciation recapture has the potential to make your AGI high enough to disqualify you for tax credits you would otherwise get without recapturing the depreciation.
3) Recaptured depreciation is taxed at the "ordinary" income tax rates anywhere from 0% to a maximum of 25%. What you rate will be, depends on the AGI. But it's currently capped at a maximum of 25%. Congress could change that in the future.
I myself have three long term rental properties. I prefer to keep my depreciation each year as low as a legally can just for the reasons cited above.
Now with short term rentals, I don't know what you're defining as "short term". Maybe you're looking to rent it out like a hotel through AirB&B or VRBO? If so, then it's perfectly possible it would qualify as a SCH C business instead of SCH E. One of the many requirements for this to qualify as a SCH C business is that you must provide services on a recurring basis that are "directly beneficial to the tenant." For example, daily maid service to make beds, cleaning the kitchen, preparing meals, drycleaning services, laundry services and the such. Providing these services between tenants may not be enough. You'd need to provide services during the tenant's stay that are "directly beneficial" to that tenant. (I would think that weather the tenant actually uses those services or not would be irrelevant.)
Additionally, if operated as a SCH C business the property would be depreciated over 40 years, whereas if operated as a SCH E business the property gets depreciated over 27.5 years. So starting as one type of business and switching to another (SCH C or SCH E and vice-versa) is not a simple matter by any stretch.
@Carl wrote:You'd need to provide services during the tenant's stay that are "directly beneficial" to that tenant.
It is simply "substantial services that are primarily for your tenant's convenience".
See https://www.irs.gov/publications/p527#en_US_2020_publink1000234064