A new AC + furnace were installed (replaced old AC and furnace) for a total cost of $7,800
The safe harbor election has nothing to do with the amount paid or who paid it. It applies to the total line item cost (which may or may not include labor).
Now even if itemized, I doubt the line-item cost of the AC/Furnace was less than $2,500. I also doubt than an AFS (Applicable Financial Statement) is maintained and filed with any government agency on a recurring basis. So that knocks out the increase to $5K for safe harbor election. An AFS includes a financial statement required to be filed with the Securities and Exchange Commission (“SEC”) or a certified audited financial statement accompanied by the report of an independent certified public accountant for credit purposes, reporting to shareholders, or for other non-tax purposes. An AFS also includes a financial statement required to be provided to a federal or state government or agency other than the IRS or the SEC. This is not all that common for a rental property owner, partnership or multi-member LLC that deals in real estate rental property.
However, a new furnace/AC does meet the requirements of a property improvement since it meets the two basic criteria.
- It becomes "a material part of" the main structure.
- It adds "real value" to the property; i.e.: when appraised by a qualified, certified, licensed property appraiser they will appraise the value of the property at a higher value than they would have without the new furnace/AC
The asset should be classified as Residential Rental Real Estate under MACRS and depreciated over 27.5 years. Others will say classify as an appliance and depreciate over 5 years. An "appliance" doesn't become a material part of the structure. So the furnace/AC is not an appliance. (This is a "really" grey area for a hot water heater, but that's another story.)
The point I am trying to make is that I would consider this as "repair " since it just maintains the value and rentability of the asset.
Respectfully disagree based on my above, based on my experience. A few years ago the cooling fan motor on the outside compressor unit quit working. Thankfully, I caught it soon enough before the compressor overheated to self-destruction. Called a repair tech and they were able to replace just the motor at a cost of less than $500 including labor. This was a repair expense.
Just last year in another rental property, the compressor motor outside, and the blower unit inside were both fried by a massive power surge. Replacement was the only option, since when the compressor motor flew apart it took out the cooling coils with it. I was only 6 years into the depreciation of this unit.
Entered the new unit (about $7500) as a separate asset.
I also deducted the remaining depreciation not yet taken on the old unit as a casualty loss.
