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sviyer
Level 3

Water-heater Replacement - Expense or Depreciate?

Replaced a water heater for around $4500 in 2020. I've been renting part of my house and been depreciating its value. Wondering if I should depreciate it or add it to this year's expenses. 

 

Wondering if anyone can tell me the advantages of one versus another. One problem with depreciating it is that it will be over 27.5 years, and I will replace the heater in 10 years, so I will still be depreciating it after I replace it, which will be kinda weird. With an expense, I can finish it off this year. Is there any advantage of depreciating it?

 

Thanks!

 

 

12 Replies
jtax
Level 9

Water-heater Replacement - Expense or Depreciate?

This prior discussion should answer your question

 

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/can-a-water-heater-be-treated-as...

 

It explains why 27.5 yrs is the correct timeframe.

 

In order to expense it you must be eligible for the de minimus safe harbor rules. See page 4 of

https://www.irs.gov/pub/irs-pdf/p535.pdf

 

If you are eligible (very likely) then it is usually better to deduct now rather than spread it out. Unless you don't have other income to offset. Or unless you think (your) tax rates will increase in the future and that they are very low now. That is of course unknowable for sure.

 

Note that if you do depreciate it, when you replace it, you do not continue to depreciate it. You can only depreciate assets you still have. 

 

Rather you will have a loss for unused deprecation in that year. So it isn't wasted. You mark the asset in TT as abandoned (or sold for nothing) and TT will do the rest. If instead of abandoning the asset you sold it then you might have a gain or less loss depending upon the proceeds and how much had been depreciated.

 

E.g. keeping it simple: $1k asset, 10 yr life, $100 depreciation per year (ignore partial year conventions). asset is abandoned right after year 5 (no value at that point).

 

Asset basis = $1k - depreciation allowed or allowable = $1k - $500 = $500

Proceeds received = $0

gain = proceeds - adjusted basis = $0 - $500 = -$500 (e.g. $500 loss).

 

TT will put that on Form 4797 in the year of abandonment and it will offset other income.

 

See https://www.irs.gov/pub/irs-pdf/p544.pdf  page 5

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SweetieJean
Level 15

Water-heater Replacement - Expense or Depreciate?

That's an expensive water heater.

sviyer
Level 3

Water-heater Replacement - Expense or Depreciate?

Thanks!

 

If I breakdown the heater replacement into heater cost, install cost and miscellaneous costs - each component is less than $2500. Two questions:

 

1. Can I deduct all these as expenses (including tax)

2. I also live in the property, so I rent out 2/3rd of the property. Do I need to only put 2/3rd of the heater as expenses?

 

Thanks!

Carl
Level 15

Water-heater Replacement - Expense or Depreciate?

If I breakdown the heater replacement into heater cost, install cost and miscellaneous costs - each component is less than $2500.

Typically, that's not done. Per IRS Publication 946:

The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception below), freight charges, and installation and testing fees. The cost includes the amount you pay in cash, debt obligations, other property, or services.

Exception. You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). If you make that choice, you cannot include those sales taxes as part of your cost basis.

jtax
Level 9

Water-heater Replacement - Expense or Depreciate?

| If I breakdown the heater replacement into heater cost, install cost and miscellaneous costs - each component

is less than $2500. Two questions:

 

| 1. Can I deduct all these as expenses (including tax)

 

I don't know. Pub 535 says "The amount paid for the property does not
exceed $2,500 per invoice (or per item substantiated by invoice)" ... so if the invoice calls those items separately it would appear so. But the repair regs are very complicated so I won't give you a definitive answer. You might want to do more research in the safe-harbor and see if you can find some examples of splitting an single invoice up. For example does "item" mean a physical item or does it mean a billing unit? It could mean the heater and installation costs. But if there was a heater and an air conditioner on the same invoice you could split it up. I just don't know. Here is one article addressing the general area of splitting invoices. https://www.journalofaccountancy.com/issues/2014/may/20149424.html

 

| 2. I also live in the property, so I rent out 2/3rd of the property. Do I need to only put 2/3rd of the heater as

| expenses?

 

Very good question. 

 

If you live in the building (or just don't rent out some of it) you must allocate each and every expense between rental and personal.  TT will help you do that during the interview.

 

Some expenses are 100% rental. E.g. a plumber call to fix a tenant's leaking sink.  Some expenses are 100% personal (your unit). Some are mixed (painting the house, common electricity).

 

You can choose any reasonable method to allocate the shared expenses. It could be per unit (I'm guessing there are 3 and you live one). It could be by area. Maybe one unit is smaller or bigger. (E.g. has more people living it in using more hot water). But you must be consistent.

 

See https://www.irs.gov/pub/irs-pdf/p527.pdf page 16 ("Renting Part of Property" for details.

 

 

 

 

 

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jtax
Level 9

Water-heater Replacement - Expense or Depreciate?

Oh @sviyer ... another thing to consider is that you could use sec 179 to deduct the rental portion that would normally be depreciated. Sec 179 allows you to deduct a certain amount of otherwise depreciatable assets, subject to various limitations (which I am not up to date on).

 

Enter the water heater as you would any other asset and look for TT to ask about "sect 179 expensing"

 

See this article for some more info

 

https://www.nolo.com/legal-encyclopedia/section-179-expensing-rental-property-owners-deduct-long-ter...

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sviyer
Level 3

Water-heater Replacement - Expense or Depreciate?

Thank you @jtax  and @Carl.

 

1. I've decided to not do the de minimis since my invoice groups together heater + install = 3039, and I don't want to take the risk of breaking it up.

2. I've decided not to do section 179 - because I don't want to deal with the hassle of re-capture if I stop renting the house a few years down the road.

3. So, I've decided to go ahead and depreciate it over 27.5 years. To do this, I add a new asset under "Assets/Depreciation." I'm not sure which category to choose from "Rental real estate property", "Computer video", "Tools" and "other". I've chosen "Rental real estate property" for now - and under that, there are 3 options "real estate", "appliances" and "land improvements". 

I've read that water heater depreciation is not considered an appliance, so I'm not sure what to do here. Should I choose "land improvements" ? Thanks!

jtax
Level 9

Water-heater Replacement - Expense or Depreciate?

A response in this prior discussion

 

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/can-a-water-heater-be-treated-as....

 

says (without citing any authority) that a water heater is considered part of the plumbing and therefore the building. So I would suggest you consider treating it as residential real estate property. It is not a land improvement (see Pub 946) those are paving parking areas, digging swimming pools, docks, bridges, etc.

 

I'm not sure recapture is that big a deal (TT will figure it out for you) but it is up to you to decide whether you would be better off with the deduction now or later.

 

 

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Carl
Level 15

Water-heater Replacement - Expense or Depreciate?

I've read that water heater depreciation is not considered an appliance,

That has been a grey area for as long as I can remember. The current take is that, since a water heater becomes a physical part of the plumbing system, and there's no question that the plumbing system is a physical part of the structure, a water heater gets classified as residential rental real estate and depreciated over 27.5 years.

my invoice groups together heater + install = 3039

Just curious, because the last time I had a water heater installed, it was a 70 gallon electric. Including installation, cost was a total of around $800.  So just what is it that costs so darn much about your water heater? Gold plated? The price you are stating even though in includes installation, seems beyond price gouging. I'd call it statutory financial rape.

sviyer
Level 3

Water-heater Replacement - Expense or Depreciate?

@Carl - Its a Bradford white RG2PV50H6N, which is listed online as $1700 - and then I'm guessing that they had charges relating to transport, hauling back the old heater etc. etc. Yes, its pretty expensive, but it was done through a company that the home depot recommends, so I'm guessing they are hopefully using reasonable market rates. I think the extra cost is for this thing called "power vent."

Carl
Level 15

Water-heater Replacement - Expense or Depreciate?

Ah I see. That's one that uses natural gas, and you have to deal with the venting and all that stuff. As for cost, I'm in NE FL where electric is most common. A 70 Gal electric heater runs about $675 at the local home depot here.  Also, their labor charges are excessive and to have that particular one installed through HD would be over $1K. I use a local plumber and electrician for all my rental property needs on that front, and the labor is noticeably cheaper. Last one I had installed was about 2 years ago and with labor and all, including hauling off the old one, came to around $875.

I suspect you're up north where power failures in the winter could lead to frozen pipes, thus making NG the more common sense route. Especially if NG is used for heating the house too.

 

sviyer
Level 3

Water-heater Replacement - Expense or Depreciate?

Yeah, on top of that, most of the cost comes due to this "power vent" stuff. There are other ways to do this, but apparently the builder was lazy and went with this way.

 

Ultimately, I went with depreciating it, coz that seemed to be straightforward in terms of paperwork - so less dangers of being audited for no reason.

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