In 2020 took both an expense and depreciation for a rental's waterheater. The depreciation became a disallowed 179 carryover. Should I still enter and never use?

[Mike9241]

what do you mean you took both an expense and depreciation deduction for the same water heater?  sounds like you double-dipped - deducted the same item twice which is not allowed.

if you expensed the water heater and never got the depreciation deduction for it, delete it. from the asset section.

[Carl]

In 2020 took both an expense and depreciation for a rental's waterheater.

That's double-dipping and a definite no-no. You either expense it *or* depreciate it. You can't do both. Since you expensed it on your 2020 tax return, you need to delete the asset entirely on your 2021 return.

Next, check your 2020 tax return. If you were allowed any depreciation on the asset in any way, shape, form or fashion (27.5 year, SEC179 or SDA), you need to amend and recapture that depreciation (I seriously doubt it will make any difference on your tax liability for 2020 though) and remove the water heater entirely from the assets/depreciation section.

Take note that a water heater is in that "grey area" too. While others may (and most certainly can) disagree with me, I view it like this:

The water heater becomes "a physical part of" the plumbing when installed, which is already "a physical part of" the structure. Therefore it gets classified as residential rental real estate and depreciated over 27.5 years. With that classification it's flat out not eligible for SEC179 or the Special Depreciation Allowance (SDA).

Now in my area the cost of a new water heater including installation is between $800-$900 and depreciating that over 27.5 years, you're only talking $30-35 a year. Doesn't change your tax liability by a single penny. So I'd just expense it in the year of purchase/installation under Safe Harbor di-minimis and be done with it. (Sounds to me like that's what you did, too)

[Anonymous_]

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@Carl wrote:

....it gets classified as residential rental real estate and depreciated over 27.5 years. With that classification it's flat out not eligible for SEC179 or the Special Depreciation Allowance (SDA).

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It is still eligible for the de minimis safe harbor election if the cost does not exceed the $2,500 threshold (not sure what the SDA has to do with this scenario).

[Carl]

It is still eligible for the de minimis safe harbor election if the cost does not exceed the $2,500 threshold

I forgot to mention that cost threshold is all. Thanks for clarifying that. From what I understand, it was expensed in 2020, which is fine. But if it was also depreciated, then that's a no-no and it needs to be removed from the assets/depreciation section.

If they did "in fact" take the SEC179 depreciation on the 2020 return, then that needs to be amended to remove the asset and recapture all that depreciation. For that one item, there's really no need to start the 2021 over and re-import the amended 2020 return. They can just delete the asset from the 2021 return and press on.

[Anonymous_]

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@Carl wrote:

If they did "in fact" take the SEC179 depreciation on the 2020 return, then that needs to be amended to remove the asset and recapture all that depreciation. 

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There is nothing to recapture since the Section 179 deduction would be suspended (and carried forward) until there was sufficient business income. If the rental is treated as a passive activity (as are many, if not the vast majority), then the income is passive and the Section 179 deduction would continue to be carried forward.

[Anonymous_]

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@Carl wrote:

I forgot to mention that cost threshold is all. 

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You used the wrong term entirely. "SDA" (aka bonus depreciation) is not the same as the de minimis safe harbor election.

[Carl]

Actually, in that particular post I was referring to the special depreciation allowance. I recall when rental assets were not eligible for SEC179 at all. It was either SDA or regular depreciation based on MACRS class.Not sure I recall correctly, but I think it was 2016 when the safe harbor limits were introduced. Or what is 2014?

[Anonymous_]

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@Carl wrote:

Actually, in that particular post I was referring to the special depreciation allowance. I recall when rental assets were not eligible for SEC179 at all. It was either SDA....

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They are still not eligible (and never were) unless the rental activity rises to the level of a trade or business.

You are simply conflating the de minimis safe harbor with bonus depreciation (SDA); they are not the same.