Rental Property Special Assessment Deduction or Depreciation

[andre_arrieta]

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!

[RobertB4444]

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.

@andre_arrieta 

[andre_arrieta]

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?

[DianeW777]

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):

• What can I depreciate or expense with the business safe harbor method?
• How do I handle capital improvements and depreciation for my rental?

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

• 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

 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. 

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2023? mark the Yes button and click Continue.
2. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
3. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less.
4. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision.
5. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2023?
6. If you say Yes, you will be taken through the screens for the Improvements election.
7. If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets.
8. On the Rental Summary screen go to the Expenses section and click on the Start/Update box.
9. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished.

@andre_arrieta 

[Edited: 03/05/2024 | 2:48 PM PST]

[andre_arrieta]

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.

[DianeW777]

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.

1. Safe Harbor Election for Small Taxpayers - For the HVAC - 
   • Special requirements - 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
2. Safe Harbor for items that each cost $2,500 or less - Available for the hot water tank 
   • No special requirements

@andre_arrieta  

[andre_arrieta]

@DianeW777 Thank you! I missed that there were different safe harbors available for different scenarios