Tax Year Prior to 2020: Amortize or expense an improvement

[jimpgh]

Rental property improvements – New windows and a patio door were installed on my rental condo in 2019 for a cost of $7,647.  In Turbo Tax (TTax) I chose the improvement categories:  “Real estate rental property,” then “Appliances, carpet, furniture.”  This led to an option of amortizing the purchase or using a Section 179 expense.  But I think that since this purchase is intended to last about 20 years that it should be REQUIRED to be amortized.  Did I make a wrong choice?

[VictorW9]

Well generally, amortization does not apply to tangible property. The improvements you made should be depreciated. The new windows and door can be classified as tangible property and be depreciated over their useful life.

[Carl]

The improvements you mention are without question or argument "a physical part of" the rental structure and they will remain so permanently and forever. The correct classification is Residential Rental Real Estate. They get depreciated over 27.5 years. Property improvements are never under any circumstances, amortized. There are no exceptions.

Residential Rental Property is *NOT* eligible for the SEC179 deduction. Period.  At best, you might qualify for the 50% special depreciation allowance and that's it. But taking that allowance does not and will not help you tax-wise.

The 50% special depreciation allowance allows you to depreciate a maximum of 50% of the cost basis in the first year. But with "residential" rental property it will not make one single penny of difference in your tax liability.

Rental property practically always operates at a loss "ON PAPER" at tax time; especially if you have a mortgage on the property. When you take the depreciation you are required to take by law, along with your deductible expenses of mortgage interest, property taxes and rental insurance, those items alone will exceed the total amount of rental income you receive for the entire tax year. Add to that your other allowed rental expenses (repairs, maintenance, etc.) and you're practically guaranteed to have no taxable rental income. Not a penny.

When your rental expenses get your taxable rental income to zero, any remaining expenses to be deducted are carried over to the next year. So with rental property your carry over losses will continue to grow and increase with each passing year. (You can only deduct rental expenses, from rental income, and that's it)

If you take the 50% special depreciation allowance, all that does is increase your carry over losses. But since depreciation has to be recaptured and taxed in the year you sell the property, that can work against you in the year you sell.

In the year you sell the property all prior depreciation is recaptured and added to your sales price. This increases your AGI and has the potential to put you in a higher tax bracket. So taking that special allowance will never help you. But it will help the IRS if you sell the property before the asset reaches it's half life since you have to recapture all that depreciation.