Costs for New Boiler, then costs to Fix it right

[BobFowkes]

During the 2021-22 winter here in Boston, the Boiler at my multifamily went kaput.  This is an investment property for my wife and I, and for our son.  We own 50%, he owns 50% and lives in one of the two units.  This is not germane to my question, but I thought I would set the scene.

This was right after Christmas and during the pandemic.  Every HVAC contractor I reached was booked for this kind of work, out 4-5 weeks.  I finally found a small outfit who could start in a week.  So they ordered the new boiler and I bought space heaters for the tenants and we waited.  The new boiler was delivered but the contractor didn't have the right gear to move the 1,000 pound boiler into the basement.  Couple of weeks later his crew managed to install the thing.  Sort of.  Cost was a little over $11K.

But the thing banged like crazy when it was heating up, and everyone complained.  At this point the contractor completely ghosted me.  I found another contractor, this one reputable, and his crew came in and re-piped the thing, and everything was fine.  Cost:  almost $7K.

So I'm doing the taxes for the place, and I assumed that all $18K should be added to the property's basis and depreciated.  But then I read something about "betterment" that seemed to be suggesting that costs that make systems better must be capitalized while costs that just fix stuff can be expensed.

Opinions?

[Vanessa A]

So I'm doing the taxes for the place, and I assumed that all $18K should be added to the property's basis and depreciated.  But then I read something about "betterment" that seemed to be suggesting that costs that make systems better must be capitalized while costs that just fix stuff can be expensed.

Capitalization is the same basically the same as adding the cost basis and depreciated.  

Yes, you would use $18k for the furnace, if this is a rental property, you would not add it to the cost basis.  Instead in the asset section of the rental questions, you will add your new furnace as a new separate asset. 

Also, depending on how you have the investment set up and who paid the expense, you may need to split the asset with your son so $9k on your return as the value and $9k on his return as the value of the asset. 

[BobFowkes]

Appreciate the response, Vanessa.  Almost ready to give up, but my son found and sent me this excerpt from tax guidance for landlords:  

Safe Harbor for Small Taxpayers

The safe harbor for small taxpayers (SHST) allows landlords to currently deduct all annual expenses for repairs, maintenance, improvements, and other costs for a rental building. However, the SHST may only be used for rental buildings that cost $1 million or less. And the annual SHST deduction is limited to the lesser of $10,000 or 2% of the unadjusted basis of the building. This limit is determined on a building by building basis—for example, if you own three rental homes, you apply the limit to each home separately.

Does this NOT apply to the circumstances that I outlined?

Thanks

[Vanessa A]

MAYBE, since you spent $18,000 on the system, this is over the $10,000 limit.  The limit is the lessor of $10,000 or 2% of the unadjusted basis of the property.  If you are claiming the full $18,000 (which is the total cost for that furnace to get  up and running) this would be greater than the $10,000 limit.  If you are splitting it with your son 50/50 then it wouldn't be over the limit. When you enter the HVAC system as an asset in TurboTax, it will ask you multiple questions and then give you the option to either take full depreciation (if you qualify), partial accelerated depreciation or depreciate it normally.  But again, if you are taking the full cost on your return, you would not be eligible for the Safe Harbor. 

This is not listed as an expense because when you dispose of the house, all depreciation will need to be recaptured.  So, if you take full depreciation on the system in year 1 and sell it in year 2, that depreciation will need to be recaptured (added back to your income).  IF it was something like getting a leak fixed in the basement and you paid $100 for that, that would be an expense.