replacing broken appliance at rental - expense or asset?

[hayshal]

Would replacing a broken washing machine w/ a new one be considered an expense or asset?

[Anonymous_ · Accepted solution]

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@hayshal wrote:

Would replacing a broken washing machine w/ a new one be considered an expense or asset?

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You can expense the washing machine using the de minimis safe harbor election provided the cost was $2,500 or less.

See https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Ad...

[Carl]

Typically, an appliance is considered to be an asset if used in/for the production of income. Being in a rental, it's used for the production of income. So it would be treated as an asset, classified as an appliance and depreciated over 5 years.

However, a washer does meet the criteria for the safe harbor de-minimus election if it's cost is less than $2,500. Personally, I don't know anyone who would spend more than $2,500 for a washing machine in a rental property. So under safe harbor you can just expense the item and enter it's cost in the rental expenses section as a miscellaneous expense. That way, you're done with it and don't have to deal with it again on your taxes if/when it breaks in the future, or if you sell the property.

[hayshal]

Thanks @Anonymous_ @Carl . Question though, how do I go about selecting to use de minimis safe harbor election if my total repairs cost is already > $2500? Usually when I have repairs < $2500 TT will prompt a question of if you want to use safe harbor or not. 

[Carl]

my total repairs cost is already > $2500?

I'm a bit bewildered at that. How on earth can a washing machine for a rental property be anywhere close to exceeding $2500? Even if you pay someone to install it and haul off the old one, there's no way I can see the cost exceeding $2500.

Overall, with your reference to "repairs", it sounds to me like the new washer was just one part of your costs here. Can you give details please, on just what it was that cost that much? I just find it incomprehensible that any landlord would pay $2,500 or more for a washing machine.

Did you have the old washer fly apart and cause other damage maybe? I ask, because years ago we purchased a new SamSung washer for the house. One of those "computer controlled" ones. Well, the computer screwed up apparently, because in the spin cycle the RPMs got so high that the machine literally flew apart causing thousands of dollars of damage to the laundry room. That's not an exaggeration either. Filed a legal claim with the manufacturer and in the end, they paid for all of my repairs, plus paid for a new washer of my choice (definitely not a Samsung) as well as all my legal fees.

So what's your situation here? If similar to mine, you would have repair expenses for any damages you fixed, and the cost of the washer would stand on it's own.

[Anonymous_]

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@hayshal wrote:

Thanks @Anonymous_ @Carl . Question though, how do I go about selecting to use de minimis safe harbor election if my total repairs cost is already > $2500?

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I suspect you may be referring to a different safe harbor. What I was referring to is the de minimis safe harbor for tangible property in §1.263(a)-1(f). The $2,500 limit is per invoice and unaffected by repairs.

Note: Effective for taxable years beginning on or after January 1, 2016, the Internal Revenue Service in Notice 2015-82 increased the de minimis safe harbor threshold from $500 to $2500 per invoice or item for taxpayers without applicable financial statements.

See https://www.irs.gov/pub/irs-drop/n-15-82.pdf

[hayshal]

Sorry that earlier reply wasn't very clear (consequences of trying to work on this late at night). The washer was indeed way < $2500 and have documented it in the Other Miscellaneous Expenses section.

I have had some other repairs including replacing water heater, replacing broken thermostat, replacing burst pipes, and replacing AC capacitor. As long as each of these repairs was <$2500, I can add them to the Other Misc Expenses to fall under the de minimis safe harbor? And if I elect to expense them as such, I would not put anything in the Repairs section?

Thanks

[Anonymous_]

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@hayshal wrote:

As long as each of these repairs was <$2500, I can add them to the Other Misc Expenses to fall under the de minimis safe harbor? 

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Yes, because it is $2,500 or less for each invoice for tangible property. 

The costs of repairs are deductible as expenses without the need to use the de minimis safe harbor election.

[Carl]

As long as each of these repairs was <$2500, I can add them to the Other Misc Expenses to fall under the de minimis safe harbor? And if I elect to expense them as such, I would not put anything in the Repairs section?

Sounds to me like everything except the washer and the water heater is a valid repair expense. They should be entered as such.

The water heater is somewhat a grey area. A new water heater becomes "a physical part of" the plumbing system, which is already "a physical part of" the structure. Therefore it's classified as residential rental real estate and depreciated over 27.5 years. You can't classify it as anything else (such as an appliance) because it does become "a physical part of" the structure. Kinda sucks, because a new water heater including installation costs can be less than $1000. Depreciating $1000 over 27.5 years is only around $35-40 a year. But it is what it is.

Whereas the washing machine does not become a permanent and physical part of the structure. Typically it would be classified as an appliance and depreciated over 5 years. But because it's cost is less than $2,500 you can just expense it as a miscellaneous expense and you're done with it.

[Anonymous_]

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@Carl wrote:

The water heater is somewhat a grey area.

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No, it is not. The de minimis safe harbor election includes property such as water heaters (and other tangible property) provided the cost is $2,500 or less.

[Carl]

Actually, a few years back (2018 I think?) I had to replace a water heater in one of my properties. Cost including installation was around $800.  I just expensed it and considered it done. So far, so good.

My reasoning was that besides being less than $2,500, the new water heater replaced the old, broken water heater and basically didn't really add value to anything. It just "retained" the value of the property. So I saw no reason to capitalize/depreciate it since the cost was under the threshold. My nieghbor (A CPA) at the time did indicate it was a grey area, and that any chance of that being questioned was closer to none, than it was to slim. I agree.

Besides, listing it as a separate asset could potentially subject me to the county assessing a yearly tangible property tax on it. I know for a fact they do that with short term rentals in my county, since they are required to be "registered" at the county/city level.

[Anonymous_]

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@Carl wrote:

.....My nieghbor (A CPA) at the time did indicate it was a grey area....

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The amount used to be $500 until it was raised to $2,500 so that could have very well created some confusion. The CPA may also not be aware that, "...if you [a taxpayer] elect to use the de minimis safe harbor, you don't have to capitalize the cost of qualifying de minimis acquisitions or improvements".

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@Carl wrote:

...listing it as a separate asset could potentially subject me to the county assessing a yearly tangible property tax on it.

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There is an exemption on the first $25,000 in value with respect to the tangible personal property tax so the only owners who typically pay any tax are limited to those who own fully furnished rental properties.