depreciation of furnace that broke and had to be replaced

[Anding]

The furnace at my rental property (residential) broke in 2021 after 11 years of service. Does the depreciation stop or can I depreciate the remainder of the cost of the furnace this year? It seems unfair that the depreciation stops after 11 years when it's put on a 27.5 year schedule.

[Vanessa A]

Yes, the depreciation stops.  If your furnace stopped working, then you will need to report that you disposed of the asset. 

If you have this listed as an asset, you will simply need to select edit next to the furnace and when asked, marked that you stopped using it in 2021. You will be walked through the depreciation recapture and disposal steps when you report this.

[Critter-3]

FYI... if the old unit was scrapped and you got paid nothing for it then the selling price is zero thus the rest of the cost will be claimed in the year of "sale".  

[Anding]

Would you be able to explain a little more? I am not sure I got what you meant. Thank you!

"FYI... if the old unit was scrapped and you got paid nothing for it then the selling price is zero thus the rest of the cost will be claimed in the year of "sale". "

[Anding]

Thank you very much! some what related - so the new unit I put in will be on the same 27.5 year depreciation schedule, right? I cannot take section 179 depreciation on it, can I?

[PattiF]

Yes, you are correct that a new furnace needs to be depreciated for  27.5 years as an improvement. IRS Publication 527 has the details on rental depreciation.

[Carl]

Typically in your situation, when you report your disposition of the asset you'll be presented a "Special Handling Required?" screen. If you select YES, I don't know if the remaining depreciation amount is deducted in the year of disposal, or not. I don't think it is, because one of the listed reasons is "removed for personal use".

However, if you select NO you will be asked for sales information. Give it a sales price of $0 and it will be treated as sold at a loss. Any remaining depreciation to be taken will then be deducted from the rental income, and may very well be added to your passive activity loss carry over, if you have any. (You may not.)

[Anding]

I did the following, but the remaining cost did not get counted towards a loss. It only gave a $40 as depreciation for the year.  Did I miss something?

"However, if you select NO you will be asked for sales information. Give it a sales price of $0 and it will be treated as sold at a loss. Any remaining depreciation to be taken will then be deducted from the rental income"

I am hearing two different ideas here 1) the depreciation stops when the furnace breaks (I assume it means the remaining cost does not get taken off) ; and 2) the remaining cost does get taken off as a loss (but I didn't get the software to take it that way).  Am I hearing it right? which one is correct?

[ThomasM125 · Accepted solution]

In the year of disposition/sale of the asset, you will get a depreciation deduction for the months the assets was used in the business. You will also get a deduction for the loss on disposition of the asset equal to the cost less accumulated depreciation if sold for $0, as in your case. The loss will show up on form 4797 and from there flow to form 1040 on line 10 "Adjustments to income from schedule 1, line 26."

You can view your form 1040 while working in the online version of TurboTax by following these steps:

While working on your return in the Federal section of TurboTax:

   1.  Choose the Tax Tools icon on your left menu bar

   2.  Tools

   3.  View Tax Summary

   4.  Choose the Preview my 1040 on your left menu bar

@Anding

[emmel650]

I also had to replace a furnace in my rental property, but in my case the furnace was not being depreciated as a separate asset since it was part of the house when it became a rental, so it's not simple to just dispose of that asset.  Does it make sense to try to determine what portion of the house value to assign to the furnace, and what portion of the depreciation?  If so, how should this be done?  I assume if I don't do this, then I wouldn't record the disposition of the old furnace and would forego the deduction of the remaining depreciation value in the 2021 tax year.  I would still start depreciating the new furnace over 27.5 years as a new asset.  Is that correct?

[Critter-3]

Removing a part of the home for replacement will not affect the cost basis of the entire home being depreciated if you did not account for this separately when you started the rental.   All you have to do now is enter the new asset to be depreciated.  

[Carl]

Does it make sense to try to determine what portion of the house value to assign to the furnace, and what portion of the depreciation?

No. Under no circumstances should you change the cost basis of any existing asset. Doing so will completely skew the current depreciation, as well as the depreciation history on the asset.

Simply add the new furnace as a separate asset classified as residential rental real estate and it gets depreciated over the next 27.5 years. Depreciation starts the date it's placed in service.

[emmel650]

Thank you!