Replaced water heater (< $2,500) & HVAC (> $2,500) in rental. Does water heater meet criteria to be expense or do both need to be depreciated? What is annual election?

[janefrancis126]

I replaced both my water heater (less than $2,500) and HVAC (greater than $2,500) in my rental property in 2017. I meet the annual election criteria. Do both qualify as 'improvements'? If so, does the water heater meet the criteria to be expensed, or do both the water heater & HVAC need to be depreciated? How is depreciation reported in future years? 

[DianeW · Accepted solution]

The water heater meets the criteria to be fully expensed this year under the DeMinimis Safe Harbor election.  The HVAC becomes a little more complicated because it would be considered a capital improvment. Below is the example of the capital improvement rules for DeMinimis Safe Harbor.

You will add the water heater to the "other" expense of your rental expense section.  Simply add the expense there and you can use "DeMinimis Safe Harbor" as the description.  Maintain a list of the expenses you are including in this figure with your tax return records.

• IRS FAQ - DeMinimis Safe Harbor

Record these as other expenses in TurboTax Premier as follows:

• Tax Tools > Tools > Topic Search > Type rental expenses > Go
• Continue to Rental Summary and Update your Expenses
• Click the screenshots attached to enlarge and view for assistance.

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

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits: 
• 2% of the unadjusted basis of your building or
• $10,000

A detailed explanation of both is included below.

https://ttlc.intuit.com/replies/4682171

[taxdrama]

Thank you Diane for your response. I am in the same situation and will add the water heater under "Other Miscellaneous Expenses." The question I have is how do we answer the question "Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2017"? This question is at the start of "Assets/Depreciation" section of the rental property. TT states that we should not include any items that we have entered as expenses. Should we answer No to this question?

[mosheleib]

In a similar situation to the above, except my entire installation and cost was over 10,000. However, this was done over many payments. If a single payment was not over 2500, am I able to expense the entire project, or do I have to add the whole project together? 

[Critter-3]

It doesn't matter how long you will take to pay off the new asset ... the entire cost is taken in the year the asset was placed in service.  If you cannot expense it then it is depreciated.  

[Carl]

The HVAC is a capital improvement that has to be depreciated over time. No question about that.

The water heater is another matter, as the IRS rules are rather "grey" on this. They insinuate one thing in one publication, and just the opposite in another.

While the WH is less than $2,500 and does qualify to be expensed, it also becomes "a permanent part of" the structure and also maintains the value of the property. (I don't see it adding value; just maintaining value.) 

In my opinion (and we all know what opinions are like) I would capitalize/depreciate it. However, as a replacement for a bad and/or non-functioning water heater, the option to just expense it is there also since it really causes no change in the property's value. Me personally, I'd just expense it and be done with it. But if asked this same question tomorrow, I may feel completely different and suggest the opposite.