Sell house - can I expense remaining balance of asset (HVAC/furnace) not fully depreciated

[dvallee40]

I recently installed a couple HVAC/furnace units for a couple of my rental units within the last 3 years.  Since the prices were around 7K for each property I depreciated them on my tax returns (show up as a separate asset) at 27.5 years.  I am thinking of selling these houses soon and was wondering if I am able to expense the remaining balance (undepreciated amount) of the furnace/HVAC systems at the time of sale.  For example, if I paid 7K and my remaining balance to be depreciated is 6.2K can I expense that 6.2K in the year that I sell the rental property.  If not, how is this 6.2K reflected in my tax returns during the year of the sale?

Regards

Dave

[Mike9241]

unless the units are no longer functioning you can not properly expense the remaining balance.

2 options 

1) allocate part of the sales price and pro-rata sales cost to them relative to their FMV . say HVAC FMV $4,000 total property FMV $400,000 then 1% of sales price and sales costs would be allocated

2) since FMV may not be easy to determine another alternative is to allocate just enough of the sales price and cost equal to the depreciated value so there is no gain or loss on the item

[dvallee40]

Hi Mike,

Thanks for the prompt reply.  Just so that i understand are you saying that the only way to recoup the expense is to just increase the sales price of the rental property by the FMV of the HVAC unit?  I think thats what your saying.  

Oh - since I am considering purchasing a new HVAC/furnace for another property.  The HVAC lender has a program where I can pay a monthly fee which incorporates the cost of the new unit, all annual inspections and service calls, etc.  If I chose this monthly payment plan from the HVAC vendor would I be able to expense such monthly costs or is more complicated than that?  Thanks again    

[Rick19744]

When you sell property, the gain equals the sales price less the adjusted basis.

By wanting to take additional depreciation, you are now just reducing your basis which will in turn increase your gain.  This essentially may be a wash depending on your tax bracket.

The reason for this, is because when you sell the property you will have depreciation recapture to the extent of depreciation taken (allowed or allowable).  Since this is real property, the rate will be capped at 25%.

Additionally, I would make sure that you have some realistic position of how you are allocating the sales price.

If you think this through, you have an overall gain on real property.  If you attempt to reflect "no gain" on the HVAC portion, this just increases the gain in another area of the real property; once again effectively not accomplishing anything.

[tagteam]

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@Rick19744 wrote:

Additionally, I would make sure that you have some realistic position of how you are allocating the sales price.

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Yes, absolutely, and TurboTax makes this rather difficult.

Whereas professional tax preparation software has the ability to link various assets (improvements) to the main asset (e.g., the main rental structure), TurboTax does not. As a result, users have to perform the calculations manually and enter a sale for one asset, or "sell" each asset separately in the program (which requires allocations).

I am not convinced that the foregoing is not deliberate but, regardless, it is one component of the program that Intuit should fix.

[Carl]

Obviously when you purchased the HVAC unit and had it installed, you elected to depreciate it over a 5 or 7 year life span. Understand that depreciation is not a permanent deduction and never had been, unless the asset being depreciated is disposed of with no gain, usually because the asset no longer meets or performs it's designed and intended function.

When you sell a depreciable asset, you are required to recapture any and all depreciation already taken on that asset and pay taxes on that recaptured depreciation in the year of the sale. As stated above, recaptured depreciation is taxable anywhere from 0% to a maximum of 25%. Additionally, recaptured depreciation is added to your AGI and can have the potential to bump you into the next higher tax bracket. But the recaptured depreciation itself will not be taxed above the 25% maximum currently set by law.

[Critter-3]

Figuring out the % of the assets sold is nothing a fourth grader cannot do ... just set up a spreadsheet and put that elementary education to good use.

For instance ...

cost basis             % of total           sales price      cost of sale 

House  100K        76%                    140K                    15200 

land        20K        16%                      40K                     3200

AC           10K         8%                      20K                     1600

total     130K      100%                   200K                       20K