10 Unit Apt Building. Treatment of replacing HVAC unites

[donnalcop]

I apologize in advance for this but for some reason I find the depreciation rules, Bonus, and Sec. 179 difficult!
We own an apartment building (residential rental) in Florida with 10 units and I'm super active and busy managing it.  I must replace 5 HVAC units.
I have always thought that HVAC units were part of the building (real property) such that replacement of them must be capitalized and depreciated over 27.5 years.

These authors here seem differ with this conclusion saying that Bonus rules and Sec. 179 are available:

"Section 179 HVAC Deduction for Residential Rental Property"
https://accountinginsights.org/section-179-hvac-deduction-for-residential-rental-property/

"Bonus Depreciation Saves Property Managers Money"
Learn what bonus depreciation actually means for property managers, what qualifies for a deduction, and the easiest way to start saving. (See the chart "Personal Property that qualifes for Bonus Depreciation")
https://www.buildium.com/blog/bonus-depreciation-for-property-managers/ 

Are they wrong?  Thoughts?

[DianeW777]

No, they are not wrong. However certain criteria must be met and you may choose to use 'safe harbor' instead which is more clear and allowed for residential rental properties (see below).

Leased property. - Section 179

Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. This rule does not apply to corporations. However, you can claim a section 179 deduction for the cost of the following property.

1. Property you manufacture or produce and lease to others.
2. Property you purchase and lease to others if both the following tests are met.
   1. The term of the lease (including options to renew) is less than 50% of the property's class life.
   2. For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property.

Bonus Depreciation:

It depends on how you depreciated these. If you depreciated these assets as Residential Rental Property with a 27.5 straight line deprecation, then these assets are not eligible for the bonus depreciation. Bonus depreciation can only be applied to assets that have a useful life of 20 years or less. Here are some general guidelines to depreciation and expenses regarding residential real estate. 

DeMinimis Safe Harbor (DMSH) and Safe Harbor for Small Taxpayers

• What can I depreciate or expense with the business safe harbor method?
• How do I handle capital improvements and depreciation for my rental?
• Rules for this method for capital improvements (HVAC):
  • Your gross receipts, including all your other income, are $10,000,000 or less.
  • Your eligible building has an unadjusted basis of $1,000,000 or less.
  • The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits:
    • 2% of the unadjusted basis of your building or
    • $10,000

Either or both safe harbor elections would be entered in the rental activity using Miscellaneous expenses if you choose this method.

• Enter your description and amount 

Keep close track of these expenses because they will be used to reduce cost basis at the time of a future sale, thereby increasing gain at that time.

[AmeliesUncle]

That first link is flat-out wrong.  It only applies to Nonresidential Real Property, not Residential Rental Property.

The second article is a bit misleading when it includes HVAC.  If it is an easily removeable item, such as a window air conditions, yes, that is 5 year property and can qualify for Bonus or Section 179.  But built-in HVAC, such as central air conditioning and furnaces, are depreciated over 27.5 years, and don't qualify for Bonus or 179.

[donnalcop]

Thanks so much for the response!
I'm not sure I agree with your analysis of Sec. 179... bonus depreciation yes, but not Sec. 179.

My understanding is that with residential rental property (e.g., a 10 unit apartment building, all units with 1 year lease terms), as opposed to commercial property if the property being replaced, is personal property (e.g., a refrigerator, NOT an HVAC unit...my mistake on choosing HVAC for my question), we can claim Sec. 179. I don't think that, in general, HVAC is considered personal property and that is why the authors of those cited articles seem to be wrong, or did a poor job of not explaining fully what they were trying to say.

It used to be that Sec 179 was never available for rental property owners to use to deduct the cost of personal property in residential rental units. However, in a victory for landlords, the TCJA eliminated this restriction starting in 2018.

As of this point, I think the question is whether replacing 5 out of 10 AC units would be considered a repair...putting Sec. 179 aside. And I'd like a sanity check on the following example in the Regs Sec.1.263(a)-3(k) (7) Example 18.

3 of 10 roof-top HVAC units must be replaced and can be treated as deductible repairs.
"The three roof-mounted heating and cooling units are not a significant portion of a major component of the HVAC system under (k)(6)(ii)(A) of this section, or a substantial structural part of the HVAC system, under paragraph (k)(6)(ii)(B) of this section. Accordingly, O is not required to treat the amount paid to replace the three roof-mounted heating and cooling units as a restoration of the building..."

5 out of 10 is much more than 3 out of 10 so it may not be "too gray" that these 5 units must be capitalized.

[donnalcop]

Thank you!  This is also my understanding.  

What do you t hink of this  example in the Regs Sec.1.263(a)-3(k) (7) Example 18.

3 of 10 roof-top HVAC units must be replaced and can be treated as deductible repairs.
"The three roof-mounted heating and cooling units are not a significant portion of a major component of the HVAC system under (k)(6)(ii)(A) of this section, or a substantial structural part of the HVAC system, under paragraph (k)(6)(ii)(B) of this section. Accordingly, O is not required to treat the amount paid to replace the three roof-mounted heating and cooling units as a restoration of the building..."

5 out of 10 is much more than 3 out of 10 so it may not be "too gray" that these 5 units must be capitalized.

[AmeliesUncle]

I had started to mention that Regulation, but realized it would not apply to 5 out of 10.  The highest any of those examples get is 4 out of 10.

I don't know your exact situation, but if any of the units could wait to be replaced, you may consider replacing three this year and then the other two next year.

[donnalcop]

Thank you! This forum is great because of folks like you.