How can I deduct the full cost of my new fence using the 100% bonus depreciation rule?

[DA248]

I own a triplex apartment building that I rent, and I installed a new vinyl fence that cost $9,800.

I would like to take advantage of the 100% bonus depreciation rule that allows an investor to deduct the full cost of capital improvements in the same year. How do I use this rule in TurboTax?

[PatriciaV]

To claim Special (Bonus) Depreciation, go to the Rental Property and click Start/Update beside Assets/Depreciation.

1. Continue to the list of Property Assets and Add An Asset. 
2. Choose Rental Real Estate then Appliances, carpet, furniture. (Fences have a useful life of 5 years, not 27.5 years like Residential Properties; also, Residential property doesn't qualify for bonus depreciation.) 
3. On the page "How Do You Want to Deduct this Item?" choose the last option "I'll take the 100% special depreciation allowance." 
4. Check the Show Details box to confirm the deprecation options for this asset.

[Carl]

Per IRS publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf on page 17 it states:

Land and land improvements do not qualify as section 179 property. Land improvements include swimming
pools, paved parking areas, wharves, docks, bridges, and fences.

Then on page 28 it states:

5. 15-year property.
a. Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges).

So I don't know how anyone came up with a fence being 5-year property, when it's 15-year property. It's not eligible for the SEC179 deduction, but is eligible for the Special Depreciation Allowance (SDA).

[DA248]

Patricia,

Can you please verify if the following steps I selected in TurboTax are correct, regarding my previous question?

1. I clicked on Add an Asset

2. Selected Intangibles, Other Property

3. Under this asset, selected Other asset type.

4. Under "Tell us about this rental property."

       I entered: "New Vinyl Fence."

       Cost (the amount I paid): $9,800

       Date purchased or acquired: 12/28/22

5. Have you used this item 100% for this business since you acquired it?

       Selected "Yes"

        Enter the date that you first started using it for business: 12/30/22

6. Select the asset class that is asset is a part of. If you need more information, refer to Publication 946 in "Help".

       Asset class: "15 year"

7. Select the method you want to use to depreciate this asset.

       Depreciation Method: "Straight Line"

8. How do you want to deduct this item?

    Since this is the first year of business use the asset, you may deduct its full value this year or spread the

    deduction over several years.

9. Select an Option:

     I selected "I'll take the 100% special depreciation allowance."

Please verify if I made the correct choices for this asset.

Thank you in advance.

[Carl]

Your choices are fine. Just be aware of one thing.

Depreciation is not a permanent deduction. When you sell or otherwise dispose of the property, that depreciation taken has to be accounted for. If you sell the property, all depreciation taken up to the date of the sale is required to be recaptured. You will pay taxes on that recaptured depreciation in the tax year you sell the property. Recaptured depreciation is taxed at the ordinary tax rate anywhere from 0% up to a maximum of 25%.

Since long term residential rental real estate commonly operates at a loss every year on paper at tax time, taking the SDA to claim/deduct it all in the first year will most likely make no difference on your tax liability. So I  would suggest you check it both ways. If there's no difference, then there's no benefit to taking the SDA in the first year. However, in the year you sell the property, there's a good chance the recapture *will* make a difference on your tax bill in the tax year you sell the property.

Recaptured depreciation is added to your AGI in the year you sell and there's always the possibility it will be "just enough" to bump you into the next higher tax bracket.

[DA248]

Hello Carl,

Thank you for quick response. I am aware of the possible recapture rule, so thank you for that.

I did, however, go with a different option to depreciate my asset (Vinyl Fence). I did the following;

1. Selected Rental Real Estate Property

2. Tell us about this rental Asset.

     Describe the item or asset: New Vinyl Fence

     Cost: $9,846

     Date purchased or acquired:  12/28/22

     I selected: "I purchased this asset."

3. Have you used this item 100% for this business since you acquired it?

     "Yes"

4. Enter the date that you first started using it for business: 12/30/22

5. Special Depreciation Allowance

    This asset qualifies for one time special depreciation deduction of $9,846. 

    Do you want to take this deduction?  "Yes"

[DA248]

Hi Patricia,

Thank you for your response. I did use the Special Depreciation Allowance as you recommended, however, just a small correction on your recommendation. The useful life for a fence is 15 years per publication 946 page 28 as Carl suggested.

Thank you for your help.

David

[DA248]

Here are the details (Asset Summary) after I selected the special deduction: