Carl
Level 15

Investors & landlords

Everything you describe meets the IRS definition of a property improvement and has to be treated as such.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

 

When you paid for the improvement is irrelevant. Depreciation starts on the day that improvement is "available" for rent.  Your improvements are classified as Residential Rental Real Estate and depreciated over 27.5 years.

Be aware that residential rental property improvements do not qualify for the SEC179 deduction.  But there are some improvements that will qualify for the 50% Special Depreciation Allowance. The program has no earthly way of knowing if an improvement you enter qualifies for the allowance or not. You personally are expected to know. That's why the program will ask you if you want to take the allowance.

I can tell you right now that none of your improvements qualify for this, because all of your improvements become "a material part of" the rental structure.

It's when you have other rental assets you are depreciating, such as furniture if you are providing a furnished rental, that you can use the special depreciation allowance.

Overall though, I don't see why anyone would want to use the allowance, since for a vast majority of rental property owners it makes absolutely no difference to your tax liability anyway. It only helps the IRS get more taxes from you if you sell the property prior to passing the assets depreciable half-life.