Replaced HVAC system in rental home - (cost $5K, 20% depreciated). New HVAC was $10K.Do I write off $4K un-depreciated HVAC old system & add on $10K to the house basis?.

[wmcmican]

I had to replace an HVAC system 5 years into depreciation schedule after Hurricane Matthew.   When new the system was $5,000 but I depreciated it as part of the cost basis on the home.    80% of value still remains.  My loss on the system was $4,000.  --  New HVAC system cost $10,000 and including repairs to the ducting system. ....    Do I subtract the loss from the home basis, and add on the new system to the basis. ... continuing depreciation for 27.5 years .  Or do I write off the old system and create a new depreciation schedule for the new HVAC system?

[Critter · Accepted solution]

1) enter the new system into depreciation as a new asset ... do not adjust the price because of the old unit

2) remove the old asset by taking it out of service ... sale price $0 ... this will get the balance of the cost written off

[TaxGuyBill]

It sounds like the original furnace was included as part of the Cost Basis of the entire house.  In that case, you can 'separate' the furnace from the house.

You would determine the Fair Market Value of the furnace when it was started to be used as a rental, and subtract that from the Cost of the house.  You would then create two 'new' assets:  (1) The house with the lower Cost Basis (without the cost of the Old Furnace), and (2) the Old Furnace.  You would allocate the "prior depreciation" between those two new assets based on the Basis of each of them.

You would then 'sell' the old furnace for $0, and you would delete the old house asset (which had the furnace built-in to it).

As Critter said, add the new furnace as a separate item.

[wmcmican]

Does the loss on sale to $0 show up as additional depreciation expense, or some other account?

[TaxGuyBill]

It shows up as a sale (or casualty loss) on Form 4797, which ends up on Line 14 of your Form 1040.

[mjt208]

Hello Tax guy Bill,

I searched all over the net but I think you have given a very good answer.

I am doing my 2018 taxes.

I have a similar situation where the original hvac cost is included in the original cost basis of the house. I had to replace the old hvac with a new hvac for $4700. I am depreciating the new hvac of $4700 for 27.5 years as a new asset

but the problem arises in separating the old hvac cost from the cost basis of the house.

I have tried something as under. Can someone guide me, if this correct as per IRS rules.

Cost of house on 6/2013 - 110000

total depreciation on the house from 2013 to 2018 = 18167

Final Demand Method 

PPI data index(commodity) : 109.2 (June 2013) and 116.4 (Aug. 2018)

% diff. between 2 indices 6.593%

so cost of old Hvac as of 06/2013 : 4700 / (1 + 6.59%) = 4409

House cost  as on 06/2013 : 110000 - 4409 = 105591

house Depreciation  on 105591 from 2013 to 2018 =  17439

So old Hvac  depreciation = 18167 - 17439 = 728

Does it make sense? And if it is correct, How can I put it into Turbotax

[AmeliesUncle]

Yes, that is how it is done (assuming your math is correct, I didn't check it).

As was mentioned above, enter two new "assets" (house-only and furnace-only), sell the furnace "asset", and delete the old "asset" (combined house and furnace).

[Critter]

but the problem arises in separating the old hvac cost from the cost basis of the house.

You cannot break out the cost of the hvac from the original cost basis once you start depreciating it. 

[AmeliesUncle]

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@Critter wrote:

but the problem arises in separating the old hvac cost from the cost basis of the house.

You cannot break out the cost of the hvac from the original cost basis once you start depreciating it. 

---

The Treasury Department and IRS disagree with you.

Google "Partial Disposition" and Regulation §1.168(i)-8(d).

https://www.law.cornell.edu/cfr/text/26/1.168(i)-8#d

[Critter]

You will also need to file a form 3115 for the change which will require professional assistance... by the time you pay for a pro you will not gain anything in this venture ... don't bother. 

[AmeliesUncle]

Nope, 3115 is not required for a current year tax return with a partial disposition.