While it's perfectly fine to depreciate furniture, there are some things to consider before doing so. Now I'm just playing the "devil's advocate" role here in an attempt to make you aware of all possibilities that may or may not apply to you and your specific situation; not to discourage you from doing so.
- If you have a mortgage on the property, then the deductible expenses of mortgage interest, property insurance, property taxes and the depreciation you are required to take on the property by law, will almost always exceed your total rental income for the year. This means that at tax filing time you will actually be operating the rental property at a loss *every single year* it's classified as a rental. Depreciating the furniture only adds to the loss in excess of the rental income that gets carried over each year. It does not reduce your tax liability or increase your refund. EXCEPTION: If criteria are met, you can deduct a maximum of $25K of excess passive rental losses from other ordinary income each year. (More than half of rental property owners meet the exceptions.)
- When you sell or otherwise dispose of depreciable property, all depreciation taken on that property prior to it's sale or disposition has to be accounted for. In the case of a sale, all prior depreciation is recaptured in the year of sale and taxes have to be paid on that recaptured depreciation. Recapture of depreciation can do two things not in your favor on the tax front.
a) Recaptured depreciation adds to your AGI in the year of sale/recapture
b) The recaptured depreciation has the potential to bump you into the next higher tax bracket.
- When depreciating something as trivial as furniture, it can (and at times will) create a paperwork/tracking nightmare. If that $1000 bed you're depreciating gets destroyed, you have to show it's removal from service, as well as why (to a vague degree) it was removed from service, so as to correctly deal not only with the depreciation already taken, but the future depreciation that will never be taken.
- With depreciating furniture, it's common to group items together into a single entry. For example, you may have an entry for "living room set" depreciating on a total value of $5000 over 5 yaers. In year 2, the couch gets ripped up by the family dog and has to be replaced. So now you have to deal with the paperwork and thought process to "correctly" reduce the $5000 value of "living room set" to it's new lower value, account for that portion of depreciation already taken on the couch, as well as that portion of depreciation not taken on the couch. Then, you have to add the "new" couch and depreciation on the new couch starts when you place it in service - not the date "living room set" was placed in service. In other words, then crap can become a real PITA rather quickly.
- Depending on where you live and the ordinances, laws or regulations of any taxing authority the property is in, be it city taxes, county taxes, state taxes, etc., if a taxing authority imposes "tangible property taxes" then any "savings" you may realize could be lost with having to pay a tangible property tax on the furniture every year to said taxing authority. Basically, tangible property is any non-real estate property that is utilized on a recurring basis for the purpose of producing income. As an example, that dental chair in your dentist's office is tangible property. If it's in an active dental office in my county, then the dentist will have to pay a tangible property tax to the county every single year he use's that chair to produce income. So if you're subject to anything like a tangible property tax by any taxing authority, that's more paperwork to deal with - especially when something happens and the asset gets removed from its income producing use.
