I purchased my home may 2019, converted the garage to a rental unit, started renting jan. 2021. can I use section 179 to deduct its cost on 2021 taxes?

[Mike9241]

it doesn't qualify as 179 property but as rental real estate with a 27.5 life 

[Carl]

Residential rental real estate does not qualify for SEC179. It has to be depreciated over 27.5 years.

Now there are some assets that "may" qualify for the Special Depreciation Allowance. But residential rental real estate is not one of them.

Keep in mind also that when depreciating assets, the depreciation is not a permanent deduction. All depreciation must be recaptured in the tax year you sell or otherwise dispose of the property. Two things happen in the year of recapture.

1) The recaptured depreciation is taxable in the year of recapture

2) The recaptured depreciation is added to your AGI in the year of recapture, and therefore has the potential to bump you into the next higher tax bracket.

Since you are required to take depreciation by law (like it or not) it's sometimes best to try and keep that depreciation amount as low as legally possible. Whats best for your given situation can depend on the amount of depreciation you're required to take, as well as how long you intended to keep the property..

[sunnyf224]

Tax cuts and jobs acts eliminated the rental restriction starting in 2018. It states that landlords can use section 179 to deduct personal properties items used inside the rental like appliances, carpet floors, furniture or drapes. So in theory, I could depreciate the personal properties items I purchased to run my rental unit, correct?

[Carl]

So in theory, I could depreciate the personal properties items I purchased to run my rental unit, correct?

yes. But anything specifically classified as "Residential Rental Real Estate" flat out does not qualify for SDA or SEC179.

Just keep in mind the paperwork nightmare it can create, when something classified as an appliance for example, is damaged and needs to be replaced.

Generally, with things that cost less than $2,500 you can just expense them and be done with it. Much simpler than any depreciation scheme you might otherwise elect. For example, depreciating a $1K refrigerator over 5 years would only make maybe a $2-5 difference to your tax liability each year. Whereas deducting it under the safe harbor deminimus act would allow you to just deduct the $1000 in full the first year as an expense. Then you're done with it. If that fridge breaks in 3 years and has to be replaced, you just buy a new on and expense the new one also.

In most cases for property that has a mortgage on it, all your rental deductions (mortgage interest, property taxes, insurance, depreciation) will exceed the rental income each and every year anyway. So getting nit-picky about depreciating "the small stuff" is a waste of time and effort, as it really makes no difference anyway. How it that works out when renting out a part of one's primary residence instead of the entire property may change that. It just depends on the cost factors and rental income amounts.

[tagteam]

@sunnyf224 You are correct, essentially, but with regard to personal property. Initially, you inquired about the garage itself.

[sunnyf224]

Thanks for all your help! Section 179 is first year expensing, depreciation scheme would be one year. I spent around 35k  outfitting my rental, kitchen appliances and fixtures, bathroom fixtures, windows and blinds, floors, countertops and more. In theory I want to depreciate all in 2021, depreciation is a paperless loss that is added back into you income. In turn, this with help my debt to income ratio, allowing me the opportunity to qualify for better loan terms on future investments.

[sunnyf224]

Your correct, my wording was a little off, I’m a rookie at this stuff. Trying to understand all the options I have. Thanks 

[sunnyf224]

In theory, could I use section 179 for the personal property, and then use the 27.5 depreciation scheme for the remainder of the costs it took to convert the garage? 

[tagteam]

You can use the De Minimis Safe Harbor Election for items costing $2,500 or less.

See https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Ad...

[Carl]

I spent around 35k outfitting my rental, kitchen appliances and fixtures, bathroom fixtures, windows and blinds, floors, countertops and more. In theory I want to depreciate all in 2021,

You can classify the entire cost as residential rental real estate and just depreciate the entire $35K over 27.5 years. That is, assuming everything is 100% business use. Remember, a percentage of the original purchase price of your house., equal to the percentage of floor space that is exclusive to the renter is also depreciated over 27.5 years.

Example:

You paid $100,000 for your house when you purchased it years ago. $75K is allocated to the structure with $25K allocated to the land. The converted garage is 10% of your total floorspace. You'll depreciate 10% of those figures (structure only of course). So $7.5K is allocated to the area being rented and gets depreciated over the next 27.5 years, and $2.5K is allocated to the land.

Next, you spent $35K renovating the garage. Assuming that renovation is 100% business use, the entire $35K is allocated to the renovations with nothing allocated to the land and the entire $35K is depreciated over the next 27.5 years.

Now down the road when you sell the property you'll have to recapture all of that depreciation and pay taxes on it.  The math will be much, much simpler. Just keep that in mind.

Another possible route:

Generally speaking, anything that does not become a permanent part of the structure may fall into a category other than "residential rental real estate". For example, the stove and refrigerator. If those items are invoice separately and the cost is less than $2,500 per invoiced item, then you can just expense them under safe harbor diminimus and be done with it. Whereas something such as kitchen cabinets are considered "a permanent part of" the structure. So those are classified as residential rental real estate and depreciated over 27.5 years.
Now one grey area is the hot water heater. For example, I paid $800 for a new one in one of my rentals. The way I interpret the IRS Pubs is that since the HW heater becomes "a permanent physical part of" the plumbing system, which is already "a physical part of" the structure, it has to be classified as real estate and depreciated over 27.5 years. Depreciating $800 over that period of time doesn't make one single penny of difference to my tax liability. But since this is a "grey area" in the pubs, I look at it from the IRS perspective.