Claiming full depreciation of floor/appliances after selling rental property

[keon821]

I put in a new floor, appliances, etc in 2020. When filing tax 2020, I had choice to depreciate over years or claim the deduction in one shot, but I decided to depreciate over time. Then, situation came that I sold my rental property in 2021. If I want to claim the deduction in full, can I do this in tax 2021? Or my only choice is to go back to do amendment for tax 2020? I think finding a way to claim the deduction in full is the most advantageous to me, if I am not mistaken. Thanks!

[ColeenD3]

You are referring to the de minimus safe harbor election. No, you are too late.

You cannot file an amended return to make the change in the method of accounting. The only exception is a limited late filing provision found in section 6.03(4) of Revenue Procedure 2015-13 PDF. These provisions grant, for a taxpayer who has timely filed (including any extension) its original federal income tax return for the year of change, an automatic extension of 6 months from the due date (excluding any extension) of the federal income tax return for the year of change to file an amended return in a manner that is consistent with the taxpayer's changed method of accounting and includes the original Form 3115. The return must also have a statement attached to Form 3115 that the application is being filed pursuant to Treas. Reg. § 301.9100-2(b) of the Procedure and Administration Regulations. 

[Carl]

Many are of the incorrect assumption that depreciation is a permanent deduction. It is not.

When you sell a business and/or it's assets which are being depreciated, you are required to recapture that depreciation and pay taxes on it in the year of the sale.

- Recaptured depreciation is added to, and therefor increases your AGI for the tax year of the sale.

- The increased AGI has the potential to bump you into the next higher tax bracket. (It just depends on the numbers weather that happens or not.)

If you do not depreciate the asset, then you are still required to recapture the depreciation you "should" have taken and pay taxes on it.  THis "DOES NOT APPLY" if the asset qualified for the safe harbor de minimis treatment.

The Safe Harbor de Minimis allows you to fully deduct the cost of an asset that costs less than $2,500 in the year you purchase that asset and place it in service. Note that there are other requirements to elect this option. So just because an asset costs less than $2,500 does not mean it qualifies for this treatment.

When you elect the safe harbor action to deduct the cost of an asset, two things matter here.

- The cost of the asset DOES NOT get added to the cost basis of your business or anything else.

- The cost of the asset is a permanent deduction and never has to be recaptured.

- If you sell the asset as it's own item separate from the sale of the business, (I.e.; you sell the asset, but the sale is not a part of the sale of your business.) the cost basis of that asset is $0 and the entire sale price is reportable as income on your tax return. So the sale price would be included in the total gross business income received.

[keon821]

I think there are 2 ways to expense the assets:

 de minimis safe harbor 

section 179 

I was looking at section 179 initially. But folks responded with de minimis safe harbor. section 179 is what TT suggested me. It didn't mention de minimis safe harbor. How can I make use of it in TT?

In comparing the two, it looks like de minimis safe harbor is a better option is you can take it, because it is an expense deduction that will never need to be recaptured. For section 179, you will need to recapture if the asset does not fulfill the full period of depreciation when you sell it. Am I having correct understanding?

Back to my situation, even though it's too late to apply de minimis safe harbor for tax 2020, I can still amend to do section 179, correct? is there any advantage to go back to do section 179? (let's say I have an appliance for $1000, and a hardwood floor for $5000 in 2020.)

[keon821]

and it seems the de minimis safe harbor needs to be done together for all rental properties (if you have more than one) for a tax year?

[ColeenD3]

Section 179 is not allowed for rental assets.  You can't take Section 179 for rental property, except for qualified improvement property. If you were to take it in 2020, you would have to recapture the amount not taken anyway. You would end up with the same deduction you have now.

[Carl]

@ColeenD3 I was just recently made aware that due to a change in the TCJA of 2018, SEC179 can now be used for quite a lot of things with residential rental property. As I understand it, it can not be used for the MACRS classification of "Residential Rental Real Estate" like you'd classify such a thing as a new roof, or new windows. Bot for appliances, carpets, etc., it's fine.  Now I got the below from nolo, as I can't find it in the IRS Pubs - though I did read it in an IRS pub probably 2 weeks ago. Wish I had bookmarked it.

A business can use Section 179 to deduct tangible, long-term personal property. In the past, Section 179 could not be used to deduct personal property used in residential rental property. However, the Tax Cuts and Jobs Act eliminated this restriction starting in 2018. This means that landlords can now use Section 179 to deduct the cost of personal property items they purchase for use inside rental units—for example, kitchen appliances, carpets, drapes, or blinds. For example, if you spend $3,000 for a new stove and refrigerator for a rental unit, you may deduct the entire amount that year with Section 179.

Now at https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-... it talks about the SEC179 changes and that page doesn't mention or reference rental property until you get down to "Applicable recovery period for real property", which seems to indicate the entire document applies to or includes SCH E rental property. One thing of importance I note on this page is that it defines some items and classifications for what does *not* qualify for the SEC179 deduction, in addition to providing guidance on the "qualification requirements" for those things that do qualify.

Just backs up my claim that "if it was easy, you did it wrong." 🙂

[ColeenD3]

These are my references:

PUB 946:

To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. 

Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. But the appliance does qualify for the Special Depreciation Allowance.

Cornell Law

(d)Definitions and special rules

(1)Section 179 property

For purposes of this section, the term “section 179 property” means property—

(A)which is—

(i)

tangible property (to which section 168 applies), or

(ii)

computer software (as defined in section 197(e)(3)(B)) which is described in section 197(e)(3)(A)(i) and to which section 167 applies,

(B)which is—

(i)

section 1245 property (as defined in section 1245(a)(3)), or

(ii)

at the election of the taxpayer, qualified real property (as defined in subsection (e)), and

(C)

which is acquired by purchase for use in the active conduct of a trade or business.

Such term shall not include any property described in section 50(b) (other than paragraph (2) thereof).

(6)Qualified improvement property

(A)In general

The term “qualified improvement property” means any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.

(B)Certain improvements not included

Such term shall not include any improvement for which the expenditure is attributable to—

(i)

the enlargement of the building,

(ii)

any elevator or escalator, or

(iii)

the internal structural framework of the building

@Carl

[Carl]

That "seems" to contradict what my IRS reference says. But my reference doesn't identify what pub or statute the information is from. Anyone else reading this got more info?

[tagteam]

---

@Carl wrote:

Now I got the below from nolo, as I can't find it in the IRS Pubs - though I did read it in an IRS pub probably 2 weeks ago. Wish I had bookmarked it.

---

The following link is your bookmark, but it is not in any IRS publication, it is on the Nolo web site (and it is also somewhat misleading).

https://www.nolo.com/legal-encyclopedia/section-179-expensing-rental-property-owners-deduct-long-ter...

[tagteam]

---

@Carl wrote:

That "seems" to contradict what my IRS reference says. 

---

The "iRS reference" appears to be the Nolo web site.

Regardless, @ColeenD3 cited the relevant Code section, which takes precedence over any IRS reference or publication.

[Carl]

So just another example where a 3rd party site is just flat out wrong again. thanks!

[keon821]

hi,

Great discussion about section 179 deduction.

I understand we can't go back to de minimis safe harbor in past years. 179 deduction is still possible but it may not be beneficial since I already sold the property and need to recapture depreciation.

As I move forward to current and future deductions of carpet, appliances, and other tangible expenses, I don't think i received any answer to my question regarding whether de minimis safe harbor requires all my rental properties to use this together. (Saw this in 3rd party site but this thread just mentioned that many 3rd party sites are wrong.) I prefer de minimis safe harbor over section 179 to avoid capital / depreciation recapture. So, it is good to get confirmation here.

[Carl]

Based on what @ColeenD3 referenced, SEC 179 is still not allowed for residential rental property or residential rental property assets. However, the Special Depreciation Allowance could still be applied to some assets.

The safe harbor deduction applies if the asset/item cost was less than $2,500 (not less than $5,000, as that was a wrong figure) and the asset/item had to of been purchased "new" and have no personal use prior to being placed "in service" as a rental property asset.

Keep in mind a few things about safe harbor.

- While the cost is fully deductible as an expense in the year of purchase/placed in service, it does not ever get included in the cost basis of the property.

- If you sell the asset later, then the cost basis of that asset is zero, and it's purchase price may be fully taxable. I'm also not clear if the selling price of such an asset is included in the "2 of last 5 years" capital gains tax exclusion rules.

Typically, I will use safe harbor only on an asset that I expect to last less than 5 years - if the asset qualifies of course. That way, when I need to replace the asset, I don't have to deal with any disposition of the broken/non-functioning old asset. Right now, the only asset that I use the safe harbor on, is the under-the-cabinet-over-the-stove microwave and the dishwasher. I've yet to get a full 5 years out of one, and I've been doing the rental property thing for 30 years.

[tagteam]

---

@keon821 wrote:

....my question regarding whether de minimis safe harbor requires all my rental properties to use this together.

---

Per Treas. Reg. § 1.263(a)-1(f)(5), the election applies to all amounts paid for property described in paragraph (f)(1) of that section.

See https://www.law.cornell.edu/cfr/text/26/1.263(a)-1

That would be the de minimis safe harbor amount and would apply to all property used in the rental with an invoice of $2,500 or less.