I have trouble entering new rental roof for depreciation

[granny79]

I need step by step to enter new roof on rental property.  Tips say assets/depreciation select residential

rental estate.  Then you have to select a lot of other steps and I don't know which one to get the 27.5 depreciation.  Keep getting 5 yr.  I am senior need help.  thank you,.

[AmyC]

Glad to guide you through the screens:

1. Log into your return
2. Income and Expenses
3. Rental Property, edit.
4. Review your rental summary, scroll down to sale of property/depreciation
5. Select Edit/update
6. Do you want to go directly to your asset summary?
7. Yes
8. Continue
9. Click the tiny words, Add an Asset
10. screen says -Describe this Asset
11. Select Rental Real Estate Property
12. Continue
13. screen says -Tell Us a Little More about your rental Asset
14. Select Residential Rental Real Estate
15. Continue
16. screen says -Tell Us about this Rental Asset
17. Describe ROOF
18. Cost: enter your amount paid
19. Continue
20. screen says -Tell Us More about this Rental Asset
21. Select I purchased this asset new.
22. Scroll down
23. see  have you used this item 100% for business
24. Select yes and enter the date it was finished
25. Continue
26. The asset summary - click show details and there is 27.5 year roof.

[easilytired]

I have been depreciating the rental property for two years. Last year I replaced roof and now followed all instructions in turbotax for this new asset depreciation. However, the estimated expense for the asset is $107 for a $5450 roof, 50 years of depreciation? 

The summary says years to fully depreciate is 27.5 years.

[JamesG1]

I was able to add a roof to a residential rental property in TurboTax Self-Employed and the default was 27.5 years.

Even under 27.5 years, I will grant you that the depreciation expense allowed for the year is a low number compared to what would have been paid outright for a new roof. 

But this number is generated right out of the IRS depreciation tables.

[easilytired]

Thank you for your quick response. However, based on roof cost of $5450 and 27.5 years of depreciation, the estimated expense should be $198 not $107 hence my question. Did I miss something? Thanks. 

[AnnetteB6]

Using a 27.5 year class life, a mid-month convention is used.  The result is that the first year and the last year of depreciation are not necessarily the number you would expect.  

Based on the figures you shared, it seems that you placed the roof in service in June.  The depreciation percent for the first year is 1.97%.  

See the excerpt from the depreciation tables below (from IRS Publication 946):

@easilytired

[easilytired]

Thank you. Your response on partial depreciation for the  first year is spot on. 

[granny79]

Best answer ever.  I spent hours and couldn't do it,  This reply did the trick.  I highly recommend this program to everyone.  Thanks  so much.

[snwong79]

Hi AmyC (Tax Expert),

Thank you for the step by step instructions.

My situation is as follows.  I bought and rented out a rental property on 2018.  Last year I replaced the roof and spent about $18,000 out of pocket.  

- Should I use the same depreciation steps you provided?  

- What if I plan to sell the property next year or so, do I get any tax deductions since I will not be owning it the 27.5 years of depreciation?

Also, the roofer sent me pictures of the gutter which were damaged and had holes, I replaced that as well and paid almost $3,500 out of pocket - is that considered as repair expense?

Thank you so much!

Sally

[MarilynG1]

Yes, you can depreciate the new roof on your Rental Property as an Asset.  When you sell the property, the undepreciated basis is added to the Cost Basis when reporting the sale, reducing Capital Gains.

However, the first year you place an Asset in service, you have several options for claiming depreciation, including 179 where you can deduct the full amount in the first year.

Yes, the gutter replacement will be a Rental Expense for you. 

@snwong79 

[snwong79]

Thank you so much!

I will compare the 2 ways of deduction.

[snwong79]

Hi MarilynG1 / Tax Expert

How do I enter or use the section 179 deduction instead of the 27.5 years deprecation method?

Much thanks!

Sally

[KrisD15]

No, if the rental is reported on Schedule E, it is considered "Passive Income" and you may not use Section 179 or Bonus Depreciation. 

(If you are a Real Estate Professional, the rental might be reported as a business, in which case accelerated depreciation might be allowed) 

The depreciation life of a roof is 27.5 years. 

The gutter expense could be added to the value of the roof. 

Not being able to use Section 179 Deduction or Bonus depreciation for a rental is not so bad. 

First of all, since it is Passive, a loss that is more than your rental income would need to be carried forward. passive loss only offsets passive income, so it wouldn't adjust earned income, such as wages.

Next, a sale of rental property usually results in Depreciation Recapture. 

For example:

If you purchase rental  property for 275,000 

Rent and depreciated over ten years (100,000)

your "Adjusted Basis" is 175,000 (your cost minus the depreciation you took, so in this example 275,000 - 100,000 = 175,000)

If you sell the rental for anything over 175,000 (up to 275,000) you will have to report the amount over 175,000 as "Depreciation Recapture" which is Ordinary Income. 

If you sell for 300,000, you would have 100,000 Ordinary Income and 25,000 Capital gains. 

So although you CAN"T use accelerated deprecation in 2022 on a Rental, what you are "losing out" on really isn't all that much. 

Passive Loss

[snwong79]

Hi Kris,

Thank you.

Two different properties:

1)  Property 1:  The Roof replacement is a different property than the one I sold.  So the $14,320 I paid for the rental property can only be added as an asset and depreciated 27.5 years?  I can not use the 179?  In what case can I use the 179?

2)  Property 2:  The property that I sold is as follow:

Purchase price in May 2007 was $190,000

Total Depreciation was $80,372

Net Sale price September 2022 was $324,370

So am I understanding this correctly:

 $324,270

- 109,628 adjusted cost after depreciation

-   80,372 depreciation recapture tax (is this taxable at 25%?)  $20,093

-  134,370 capital gains tax (15% long term)  $20,156

Since I have to pay all these taxes on property 2, that's why I was wondering if I could possibly depreciate the full amount for the roof on property 1.  It seemed I qualify?

Here are the rules and limitations for 2022:

• The asset must be tangible personal property, including software (not real estate).
• It must be used in a trade or business (property used in a rental activity is generally not eligible).
• You must take the deduction in the year you start using the asset.
• The decision to use Section 179 must be made in the year the asset is put to use for business.
• The deduction cannot be more than your earned income (net business income and wages) for the year.

Much thanks,

Sally

[KrisD15]

I see and that makes sense, however

Here are the rules and limitations for 2022:

• The asset must be tangible personal property, including software (not real estate).
• It must be used in a trade or business (property used in a rental activity is generally not eligible).
• You must take the deduction in the year you start using the asset.
• The decision to use Section 179 must be made in the year the asset is put to use for business.
• The deduction cannot be more than your earned income (net business income and wages) for the year.

If it is just a rental, not a business, the bonus depreciation and 179 deduction can't be applied. 

-   80,372 depreciation recapture tax (is this taxable at 25%?)  $20,093

It's Ordinary Income, so taxed at whatever your tax rate is.