Hello!
In 2023 I had a $40,000 HOA special assessment I had to pay on a rental property.
I believe I would have to depreciate this over 27.5 years and cannot count it as an expenses for 2023 but I wanted to confirm this is correct.
To add on to this question, I also replaced an HVAC system in a rental property in 2023 at a cost of $8,000. I believe this would be the same scenario in that I would have to depreciate it vs expense it but wanted to confirm this is correct as well
Thank you!
The special assessment is actually more complicated than that. It depends on what it was for. If it was for maintenance and repairs then it's deductible. If it was for improvements then it is depreciable. You will need to figure it out and maybe break it into pieces if it was for both.
The new AC unit is depreciated as part of the rent unit over 27 and a half years.
Hello Robert and thank you for your responses!
The special assessment was for repairs to exterior concrete balconies on a high rise building that were apparently not built correctly when the building was initially built. They were getting semi rebuilt. So it kind of sounds like a repair but I suppose it could possibly be looked at as an improvement?
From what you are saying it sounds like the special assessment of $40,000 is an improvement. The difference between a repair and a capital improvement would be whether it adds value to the property that will last for more than a year and/or if it is attached as an integral part of the building structure. It seems the latter is true which would make it a depreciable asset using MACRS depreciation over 27.5 years for residential rental property.
The other option for the HVAC would be the Safe Harbor Election for Small Taxpayers (does not apply to the concrete balconies HOA assessment):
Here are the rules you need to meet to take this election:
If you find you do qualify for this option and you want to take the full expense in one year for the HVAC system, use the steps below to enter it in your return.
[Edited: 03/05/2024 | 2:48 PM PST]
Thank you @DianeW777 !
It does not seem I can use the De Minimis Safe Harbor as the limit is 2,500K and the HVAC was 8K, if I understood everything correctly.
However I did also have a small water heater replaced in a rental as well that cost 1.5K and I just assumed I could expense it due to the relatively low cost, or it perhaps being considered an appliance. Seems odd that something costing 1.5K would need to get depreciated over 27.5 years. But now I am thinking it should actually be put under the De Minimis Safe Harbor as I believe it would in fact qualify.
It can be confusing like many IRS tax laws. The hot water tank will definitely qualify, you can see if the HVAC qualifies below.
There are two separate options under Safe Harbor.
@DianeW777 Thank you! I missed that there were different safe harbors available for different scenarios