is water heater replacement in a rental considered an improvement?

[mkochins]

is water heater replacement in a rental considered an improvement?

If yes then which option should be selected to describe this asset?
Should it be entered also in Other expenses?

[AnnetteB6]

Water heater replacement by itself would not be considered an improvement.  It would be depreciated as an Asset unless you made the election to write it off as an expense.  It would only be claimed in one place on your return, not both.

If you choose to depreciate it as an Asset, enter it as a Rental Real Estate Property > Residential Rental Real Estate.  It will be depreciated over 27.5 years as a component of the home.  It would not be considered to be an appliance.

[mkochins]

Thanks AnnetteB6,

Is it my choice to decide whether to depreciate the water heater or write it off as an expense?

[npierson7]

Yes, you can chose one way or another.  You cannot do both, deduct is as expense and depreciate it as an asset. 

[Boburk]

Not a tax expert.  Just a yahoo with rental property.

The way I look at it...will you still be depreciating it when it needs to be replaced again?  If so, then I write it off as an expense (repair) that year.  If not, then its an improvement amortized over 27.5 years.

In your case, the water heater will last 6-12 years normally...so you would still be depreciating it when you replace it again, if you don't write it off as a repair.

[Irene2805 · Accepted solution]

If the cost of the water heater is $2,500 or less, it can be expensed (rather than depreciated) using the de minimis Safe Harbor election.

This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

• You don't have an applicable financial statement (most people don't).
• You have a consistent process for how you record expenses and assets.
• You record these items as expenses on your books/records.
• The cost of each item as shown on your receipt is $2,500 or less.

To make either of the elections please follow these steps:

TURBOTAX CD/DOWNLOAD

Part 1.  Make the election

1. Click on Federal  > Wages & Income [In TT Self-Employed:  Business > Continue > I'll choose what to work on]
2. In the Rental Properties and Royalties section, click the Start/Revisit button.  
3. If you have already started adding information about your business, you will be asked if you want to review your rental and royalty information.  Click the Yes box. 
4. When you come to the Rental and Royalty Summary screen.  Click on the Edit box next to the property.   
5. If you haven't already started adding information about the property, continue through the screens to enter the needed information.
6. You will now be on the Review Your [property name] Rental Summary screen.  
7. In the Assets/Depreciation section, click on the Start/Update box.
8. If you’ve already entered some assets, you will see the screen, Do you want to go directly to your asset summary?  Mark the No box and click Continue.
9. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2019? mark the Yes button and click Continue.
10. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.  .
11. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less.
12. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision.  Proceed with Step 2, below.
13. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2020?
    • If you say Yes, you will be taken through the screens for the Improvements election. 
    • If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets.

Step 2.  Enter your election-related items as other expenses.

1. On the Rental Summary screen go to the Expenses section and click on the Start/Update box. Click I'll choose what I work on. 
2. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished. 

TURBOTAX ONLINE

Part 1.  Make the election

1. On the Wages & Income screen.
2. In the Rentals, Royalties, and Farm section, click the Start/Revisit button for Rental Properties.  
3. If you have already started adding information about your business, you will be asked if you want to review your rental and royalty information.  Click the Yes box. 
4. When you come to the Rental and Royalty Summary screen.  Click on the Edit box next to the property.   
5. If you haven't already started adding information about the property, continue through the screens to enter the needed information.
6. You will now be on the Here's XX rental property info screen.  
7. In the Assets section, click on the Add expense or asset box.
8. If you’ve already entered some assets, you will see the screen, Do you want to go directly to your asset summary?  Mark the No box and click Continue.
9. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2020? mark the Yes button and click Continue.
10. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
11. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less.
12. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision.  Proceed with Step 2, below.
13. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2020?
    • If you say Yes, you will be taken through the screens for the Improvements election. 
    • If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets.

Step 2.  Enter your election-related items as other expenses.

1. On the Here's XX rental property info screen go to the Expenses section and click on the Add Expense or Asset box.
2. Mark the appropriate box under Expenses (repairs, for example) and click Continue.
3. On the screen, Tell us a bit more about the repairs you selected, mark the radio button It’s a repair (expense) and click Continue
4. You will be brought back to the Here's XX rental property info screen to enter the expenses.