Limits on equipment deduction for rental?

[KevinH]

I have a second house that is partially rented.  The property has been requiring extensive improvements to the land.  If I purchase equipment (like a tractor or heavy equipment) to make these improvements vs hiring someone, is the equipment deductible using the rental property equipment depreciation schedules?

[Mike9241]

yes, they're depreciable but there are caveats.   are you or will you be subject to the passive activity loss limitations.  this could result in no current benefit from the business depreciation deduction.  what is the status of the part of the property not being rented - personal use?  this would result in a portion of the cost of the equipment being personal and therefore nondeductible/non-depreciable.  how long will you hold on to this equipment? if you sell the business portion would be subject to depreciation recapture and any loss on the personal portion not being deductible.

there might be some advantages to hiring someone. if there is personal use of the property the personal portion of the cost would be added to the basis. the business portion would likely be capital in nature but be depreciable.  again the PAL rules may come into play to limit the benefit. 

also consider that if you buy the equipment, you may want insurance to cover loss, liability, etc. the value of your labor is neither deductible nor adds to the basis. 

[Carl]

If you purchase heavy equipment (vs. renting it) for use on the rental property, claiming it as a rental asset means that the only absolute thing you ever use it for is rental property. Any other use outside of that rental property, especially personal use makes things more complicated. Using it for a single project and then letting it "sit there" while you depreciate it as a rental asset may, most likely raise flags over a short time.

[KevinH]

Thanks for the responses.  The property is rented out with a bedroom available for personal use.  As such we collect enough rent to cover ~80% of the mortgage.  The equipment in question would be used exclusively on the rental property.

Does this make the situation any clearer?

[Carl]

Just make sure you can prove business use only in case you're audited on this in the future.

Overall, it would make more sense to just rent the equipment you need for this project. Then 100% of your rental cost is fully deductible as a rental expense in the tax year you pay it.  By purchasing the equipment, you increase paperwork now, and in the future. Then you also have to deal with depreciation recapture rules in the tax year you sell or otherwise dispose of the equipment. It can, and probably will, turn into a nightmare.

[AmeliesUncle]

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@KevinH wrote:

The property has been requiring extensive improvements to the land.  

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What EXACTLY does "extensive improvements to the land" mean?  Your answer may affect how it is handled on the tax return.