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wrangler18
Level 3

Is there any negative effects of using Segmented depreciation

I renovated two rental units and I'd like to use segmented depreciation for things like kitchen cabinets, Kitchen / laundry appliances, bathroom fixtures.

 

Kind of seems like a no brainer.

 

Other than the hassle of tracking the purchases (Quickbooks) and entering them into TurboTax is there any downside to using segmented depreciation?

 

Ie. Are you opening yourself up to an audit from the IRS?

9 Replies
DianeC958
Expert Alumni

Is there any negative effects of using Segmented depreciation

Yes,  the one drawback to segmented depreciation is, when you sell the property you have to recapture any depreciation taken as ordinary income. You are losing out on having that part of the gain taxed as capital gain, which the rates are typically lower than ordinary income tax rates. The advantage to you, is you are taking a deduction for the cost of the renovations sooner on your tax return and reducing the amount of tax you need to pay now.

 

No, you are not opening up yourself to an audit from the IRS.  

 

@wrangler18

 

 

 

 

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wrangler18
Level 3

Is there any negative effects of using Segmented depreciation

I am not currently paying taxes b/c my only sources of income are my two rental properties that do not generate positive taxable cashflows.  After depreciation I am showing a loss for the next few years.  

 

I am generating NOL carryforwards and would like to use that to offset the gain from sale I will have within the next few years.

Critter
Level 15

Is there any negative effects of using Segmented depreciation

 
Critter
Level 15

Is there any negative effects of using Segmented depreciation

Accelerating depreciation in your situation will not help at all and will hurt you in the long run ... lump it all under one entry called IMPROVEMENTS for 27.5 years.  

DianeC958
Expert Alumni

Is there any negative effects of using Segmented depreciation

It is up to you if you would like a larger loss now or have more of the gain taxed later at capital gains rates instead of ordinary income rates.

 

Since you do not have any other income, the segmenting is not giving you a current benefit.  Having more of the gain, being taxed as a capital gain, when you sell the properties down the road will give you a larger tax benefit than creating a larger loss currently.

 

@wrangler18

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Carl
Level 15

Is there any negative effects of using Segmented depreciation

One possible negative effect of segmenting and separating out your rental assets for depreciation, depends on how you state and your local county looks at it. For example, in my location the county assesses a yearly "tangible property tax" on anything they classify as "equipment" that is used to produce income.

So if I separate out my kitchen appliances and depreciate them over 5 years, my county considers that "equipment" that is used for the production of income. So they assess a tangible property tax on that "equipment" each and every year. The tax assessed far exceeds the so-called "savings" I get by depreciating it separately over 5 years.

Practically every county in my state of FL does this. So it's kinda dumb to segment/separate out rental property assets if you don't have to.

Many think the county will never find out about this, since FL does not tax personal income and therefore no state tax is filed. But it bites you big-time when you sell the property and then go to record the sale at the local county courthouse. They will not complete the title transfer until "after" you have paid those back taxes, along with the fines, penalties and interest for not having reported and paid it over the years you owned, used, and claimed those appliances as rental assets. So there goes all that profit you expected to make from the sale.

 

tagteam
Level 15

Is there any negative effects of using Segmented depreciation

You can view "segmenting" in any way you desire, but the fact is a tax on tangible personal property can be levied whether or not the property is "segmented" (or separated for purposes of depreciation).

 

See https://taxfoundation.org/tangible-personal-property-tax/

 

In Florida, certain tangible personal property used in connection with a Florida-located rental property is assessed by the county property appraiser regardless of whether the property is separated for the purposes of depreciation. If the property is present on the premises, and used in connection with the rental, it is assessed and, potentially, subject to personal property tax.

wrangler18
Level 3

Is there any negative effects of using Segmented depreciation

I thought about what you guys have said regarding depreciation recapture and rental properties.

 

Here's how I understand it:

The IRS is going to depreciate the basis in the house over 27.5 years.  So the IRS is going to recapture all the depreciation I've taken on the house.  Can't do a darn thing about that.

 

Now if I decide NOT to lump the Kitchen cabinets and appliances along with the house for depreciation purposes, I can get larger depreciation amounts every year.  This will help me run a larger loss than I would if I lumped the kitchen stuff with the house for depreciation purposes.  So depreciating kitchen stuff at 5 years is sort of useless to me, b/c I will run a loss regardless.

 

But I **THINK** that larger loss gets translated into a larger NOL (Net operating loss).  Which I can carry-forward year over year.  I can use that NOL to reduce the recaptured depreciation when it comes time to selling the house.  I think it reduces the recaptured depreciation dollar for dollar.

 

I'm reading up on NOL right now, so I'm not really sure if this is how it will work.

 

I'm not sure how NYS or NYC handles depreciation recapture.

 

Feel free to correct where my thinking has gone off the road.

 

Thanks.

AmeliesUncle
Level 13

Is there any negative effects of using Segmented depreciation


@wrangler18 wrote:

kitchen cabinets ... bathroom fixtures.

 

 


Cabinets and bathroom fixtures are depreciated the same length as the rest of the house.d  As part of the house, they really can't be segregated.

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