Water heater depreciation in a rental property

[chantillytax]

I rented my second house starting 9/1/2016. When I filed my 2016 returns, I showed various assets (the house itself, fence, stove, and dishwasher) and claimed depreciation in 2016 for them. On 11/29/2017, I replaced the water heater which cost $1,349. I have the following questions pertaining to my 2017 returns:

1. Do I have to show the heater as an asset with a life of 27.5 years or can I show it as an expense? TurboTax states that I can do so if I have a consistent process for how I record expenses and assets and the cost is less than $2,500. Does the fact that last year I claimed depreciation on appliances rather than showed them as expenses prevent me from claiming the heater as expense this year?

2. Do I continue to claim depreciation on assets (other than heater) this year or is there any way I can expense/remove them this year? It's a headache to continue to show the fence in tax returns for 15 years or appliances for 5 years.

Thanks a lot for your help.

[PaulaM]

1. Generally, if the useful life is over one year, you are required to depreciate. You can, however, elect the De Minimus Safe Harbor for Business Assets Under $2500. In this way, you can expense them. The fact that you depreciated the prior appliances does not prevent you from expensing them this year. You can do this each year - expense some assets that are below $2500 and depreciating the ones that exceed $2500.

2. The only way to change the way you depreciated the prior assets is to amend the 2016 return. This would have you paying back the depreciation amounts. I'm not sure that is would not be trading one headache for another. The depreciation for the fence/appliances will just keep rolling in the tax return until the remainder of their useful life. You shouldn't have to refigure the amounts each year. You will have to decide which way to go.

See TurboTaxColeen's answer below for reference.

https://ttlc.intuit.com/questions/3930213-can-you-use-de-minimis-safe-harbor-election-or-the-improve...

[chantillytax]

Thanks for your help. What I understand is I can continue to depreciate 2016's fence/appliances and expense 2017's heater. Is this correct? If yes, where do I put the heater expense and what description do I put against it?

I looked at TurboTaxColeen's answer where she says both (expensing and depreciating) can be used for different assets. However, at one place she says, "For both elections each asset that you would normally depreciate over a number of years needs to be $2,500 or less. " What does this mean?

[PaulaM]

To deduct the water heater under the Safe Harbor provision, navigate to the asset section like you are going to list it for depreciation. You will see the question 'Did you buy any items .....that cost less than $2500 for 2017'.

TurboTaxColeen is saying that for each asset you choose to expense (ex. your water heater) must be less then $2500. So you can expense the water heater if less than $2500 and a dishwasher if less than $2500, etc.

[chantillytax]

I added the Water heater as asset and then selected "Rental Real Estate Property". After that if I select "Appliances, carpet, furniture, I am able to expense the entire $1349 this year. However, I thought heater fell under 27.5 year depreciation category (Residential Rental Real Estate). If I select this, TurboTax does not allow me to expense. It forces me to depreciate. What is the correct way? Or, is it easier to just put the heater in Miscellaneous Expenses section (which is separate from the assets)?

[PaulaM]

If you select appliances its depreciated for 5 years. Let's go a different way. Delete the heater from your asset section. We want to expense instead of depreciate under Safe Harbor. Then go to your Expense section for the rental. Choose  'Miscellaneous Expenses' and enter De Minimus Safe Harbor as your description. I'll attach a screenshot to the answer above.

[chantillytax]

I will add the water heater under "Other Miscellaneous Expenses." Now, the question I have is how do we answer the question "Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2017"? This question is at the start of "Assets/Depreciation" section of the rental property. TurboTax states that we should not include any items that we have entered as expenses. Should we answer No to this question?

[PaulaM]

Answer Yes to that question. TurboTax is referring to other expense (not this asset) when it says not to include other items expensed. Answer, Yes to the next page's question as well. Then it will have you review the asset section and remove any that you want to expense and list in the Miscellaneous section. If you have already deleted the asset, then there is nothing else to remove.

[chantillytax]

PaulaM, thanks a lot for your help. I have added the heater as shown in your screenshot under "Any Miscellaneous Section". I have answered yes to the question referred above. Now, the asset section shows only the house itself and the fence/appliances from 2016. Thanks again.

[PaulaM]

Yay! You are welcome 🙂

[chantillytax]

PaulaM, I thought about why I had depreciated the assets (instead of expensing) in my 2016 returns, the year in which I started renting out the house. All the appliances that I had shown under the Assets in 2016 return were purchased in prior years (before 2016). Hence, I could not expense them in 2016. I had to depreciate them. But, for the heater which I bought in 2017, I have the option to expense or depreciate in the 2017 return. Do you agree with what I am saying?

[PaulaM]

Yes, that makes sense. So those prior assets should continue to be depreciated. Go forward, you will have the Safe Harbor election to consider for asset purchases.

[chantillytax]

Thanks again. Now, all this makes sense. I feel like I have earned my Ph.D. in rental depreciation. Thanks to you.

[PaulaM]

LoL, having a rental property will make anyone an expert in short time. It's an extensive topic with many rewards.