Leaking Water Heater and Nonworking Water Well Pump replacements: Capital Improvement added to Basis, or Repair?

[rahosmer]

Selling inherited house, need to determine basis.

Several years ago, replaced a leaking hot water heater and at different time, water well pump that stopped working. 

Do I add the cost of those replacement to my cost basis in the house to reduce capital gain?

Or are they considered a "repair" and not added to basis?

Researching on internet gives conflicting answers, some say capital improvement others repair.

Please advise.

Thanks!

[RobertB4444]

The usual rule of thumb is that if it is new equipment that will last more than five years then you can add it to the basis.  Otherwise not so much.

In your case I would say the hot water heater can be added to the basis but the well pump that you've replaced more than once is probably just a repair expense.

@rahosmer 

[rahosmer]

Hi RobertB4444-

Thanks for your fast response.

We only replaced the water well pump once since inheriting the property in 2011, sorry if my post was not clear on that.

So going by the rule of thumb you mentioned, both the replaced hot water heater and replaced well water pump should last more than 5 years and should be added to the cost basis, correct?

Thanks Again!

[HelenC12]

Yes, that is correct. Add the cost of the water heater and well pump to the basis of the inherited house which will in fact reduce your capital gain when you sell the property.

 Related information:

• Where do I enter the sale of a second home, an inherited home, or land on my 2022 taxes?
• What is the definition of cost basis?

[Carl]

Typically, anything that becomes "a permanent part of" the structure is added to the cost basis of that structure. If the property is being used in a business (such as a rental property) then it gets depreciated over time from the date it was placed "in service" in that business.

For some non-real estate assets that cost less than $2,500, you can chose to either add it to the cost basis of the property, or outright expense it under the de-minimum safe harbor provisions.  Now hot water heaters are their own beast. One would typically think to classify it as an appliance and depreciate over 5 years. However, a water heater becomes "a physical part of" the plumbing system, which is already a physical part of the structure. Therefore, it would be classified as residential rental real estate (assuming this is a rental) and depreciated over 27.5 years.

If the well pump is just an irrigation pump, that's a simple repair expense. However, if the well is the primary water source for the house I'd treat it the same as the water heater, since it does become "a physical part of" the plumbing system. If the new pump was less than $2,500 (I'm confident it was) then no problem expensing it really.

Now, depreciating a water heater that cost on average $800 (and that includes installation) isn't going to amount to anything worthwhile each year, depreciated over 27.5 years. For me, I'd classify it as a repair expense and just deduct the $800 and be done with it.