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jschimmer
Level 2

Replaced Rental Furnace and Air Conditioner

I spent $6,500 on a new furnace and air conditioner for my rental.  It looks like a need to set it up like a new asset like property and depreciate it over 27.5 years.  I see that if it was less than $2,500, I could use the Safe Harbor.  Can I just take the safe harbor for $2,499 this year instead?  Can I use the safe harbor for Small Projects or Routine Maintenance?  Can I use Section 179?  Any help clarifying this would be greatly appreciated.

5 Replies
AmeliesUncle
Level 11

Replaced Rental Furnace and Air Conditioner


@jschimmer wrote:

Can I just take the safe harbor for $2,499 this year instead?

Can I use the safe harbor for Small Projects or Routine Maintenance?

Can I use Section 179?  Any help clarifying this would be greatly appreciated.


 

1)  No.

2)  Only if it qualifies by meeting the criteria.  But with that large amount, it seems unlikely to qualify.

3)  No.

Carl
Level 15

Replaced Rental Furnace and Air Conditioner

Can I just take the safe harbor for $2,499 this year instead?  

No. Also, just because something cost less than $2,500 doesn't mean it automatically qualifies for safe harbor either.  Since there is no question that your new furnace and central A/C became "a material part of" the structure, you are required to capitalize and depreciate it over 27.5 years. For this case, that would be true even if you paid less than $2,500 for it. (But I can tell you right now that there is no way on this green earth you're going to replace and A/C *and* a furnace for less than $2,500.  I'm sure you agree too.)

Now if this was a case where you were providing a furnished rental and you went out and purchased furniture for the house, then yes you could safe harbor the furniture if it cost less than $2,500. That furniture does not become "a material part of" the structure. So it would qualify.

 

Can I use the safe harbor for Small Projects or Routine Maintenance?  

Why? cleaning, maintenance and repair expenses aren't capitalized anyway. They're a fully deductible rental expense. So such thing as safe harbor for what is already a deductible rental expense.

Can I use Section 179?

No. Residential rental real estate and assets associated with it does not qualify for SEC179. However, it is perfectly possible for your new furnace and central A/C to qualify for the 50% Special Depreciation Allowance. That allows you to take a maximum 50% depreciation in the first year, with the remaining depreciated over the next 27.5 years.

 

But even with that, you'll find that it most likely won't make one single penny of difference to your tax liability. Rental property practically always operates at a loss every year - especially if you have a mortgage on the property. When you add up the depreciation you're required to take by law, along with the insurance, mortgage interest and property taxes you can deduct, those items alone will almost always exceed your rental income every single year.

As you know, rental income is passive, which means all of your rental expenses as passive too. So your passive rental expenses can only be deducted from your passive rental income. Once those expenses get your taxable rental income to zero (and they will every year) any excess passive deductions are just carried forward to the next year.

So you'll see your carry over losses continue to grow with each passing year you rent the property out. You can't "realize" those losses until the tax year you sell the property. Only in that year can your carry over losses be deducted from other "ordinary" income.

So in the end you'll find that if you take the 50% special depreciation allowance, it won't help your tax liability one single penny. But if you take the full 50% and you sell before you reach the halfway mark of your 27.5 depreciation period, your recapture of that depreciation will increase your AGI and could potentially put you in a higher tax bracket.

So in a nutshell, taking the special depreciation allowance will more than likely not benifit you one single bit. But it will benefit the IRS if you sell the property before reaching that depreciation period half way mark.

AmeliesUncle
Level 11

Replaced Rental Furnace and Air Conditioner


@Carl wrote:

 

Why? cleaning, maintenance and repair expenses aren't capitalized anyway. They're a fully deductible rental expense. So such thing as safe harbor for what is already a deductible rental expense.


 

No, IF it the situation qualifies (if ALL maintenance, repair AND these improvements are under the threshold), the improvements could be all deducted this year.

 

 

 


@Carl wrote:

 

Can I use Section 179?

No. Residential rental real estate and assets associated with it does not qualify for SEC179. However, it is perfectly possible for your new furnace and central A/C to qualify for the 50% Special Depreciation Allowance. That allows you to take a maximum 50% depreciation in the first year, with the remaining depreciated over the next 27.5 years.

 


 

Although the residential real estate does not qualify, the associated assets can now potentially qualify because the Tax Cuts and Jobs Act changes that.  However, in order to qualify, the rental would need to rise to the level of a "Trade or Business", which may not be the case.

 

No, it would not qualify for Bonus depreciation (which is now 100%).  Assets with a Recovery Period of over 20 years do not qualify.

jschimmer
Level 2

Replaced Rental Furnace and Air Conditioner

Thanks to both of you.  That helps.  I am just going to go ahead and depreciate it

.

jschimmer
Level 2

Replaced Rental Furnace and Air Conditioner

System wanted me to pick the best answer but I thought they both answered my questions. Thanks for the help. 

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