Is a new drilled water well depreciable?

[dancing_fern]

if so what is the time 27.5?

[TomYoung]

Yes, assuming that the well was drilled for "business" purposes, not "personal" purposes.

Per the IRS:

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https://www.irs.gov/publications/p225/ch05.html#en_US_2016_publink1000218016

Water well.   You can't deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. It is a capital expense. You recover your cost through depreciation. You also must capitalize your cost for drilling a test hole. If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. You can recover the total cost through depreciation deductions.

  If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. Abandonment means that all economic benefits from the well are terminated. For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment.

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https://www.irs.gov/publications/p225/ch07.html#en_US_2016_publink1000218148

Irrigation systems and water wells.   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. You can depreciate irrigation systems and wells composed of masonry, concrete, tile (including drainage tile), metal, or wood. In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. However, land preparation costs for center pivot irrigation systems are not depreciable.

Water wells.   Water wells used to provide water for raising poultry and livestock are land improvements. If they are depreciable, use one of the following recovery periods.

    A 15-year recovery period under GDS.

    A 20-year recovery period under ADS.

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Tom Young

[jack73]

Is it still considered a land improvement (15 yr property) when it is used for drinking water for a residential rental property? 

[KrisD15]

A septic system for a residential rental is depreciated over 27.5 years and I would assume the same for a well. 

The previous answer was addressing an oil well. 

[Carl]

Is it still considered a land improvement (15 yr property) when it is used for drinking water for a residential rental property?

Only if used for lawn/garden irrigation and not for drinking, flushing toilets, or anything else "inside" the house or structure being rented out by you.

If it is being used in the house for *anything*, then it's classified as residential rental real estate and gets depreciated over 27.5 years.

[SpokaneLandlord]

Does anyone have a source for water wells being 27.5 year property if used for supplying water inside the house, to toilets, showers, etc.?

[ErnieS0]

Table 2-1 on page 9 of Publication 527 Residential Rental Property

[SpokaneLandlord]

Thank you!

[Rick9464]

Tom, saw your input regarding a well installation.  We moved into a new home and to save water expense, installed a irrigation well.  From what I gather, it is not deductible.  Do I understand correctly that it cannot be depreciated as mentioned because its not a business?  If it can be deducted how to do?

[MarilynG1]

Yes, you are correct that you can't deduct or depreciate the cost of your well.

If this is your home and not a business or rental property, you would add the cost of the well to the 'Cost Basis' of your home, since it adds to the value of property.

For example if the current cost basis of your home is 250K (price you paid for it), and the well cost 20K, the cost basis of your home is now 270K.   

You can add to your home's cost basis the value of any improvement you do that increases the value of the property.

Click this link for more info on Cost Basis.