Tax Year Prior to 2020: Condo Roof and HVAC in same year

[JakeS]

My rental condo association assessed just over $5,000 for my portion of a new roof on all 3 of our buildings in 2019. The HVAC units sit on the roof, and I replaced my unit at just over $5,500. Do I need to depreciate both of these items over the 27 1/2 year schedule, or can I deduct part in 2019 and depreciate part?

[WKins2]

You may be able to take a current deduction for all or a part of the cost of the roof and HVAC. The IRS recently expanded the types of property that qualify for the Section 179 deduction to include both roof and HVAC improvements. There are some limitations on how much Section 179 expense can be taken. For example, the Section 179 deduction is limited to your rental taxable income (it can not create a loss or increase your loss). Any amount in excess of your rental income would roll forward to the next year.

Please see Publication 946 for detailed information on depreciation, including the Section 179 deduction. Some excerpts from this publication that apply to your situation are as follows:

You can elect to treat certain qualified real property you placed in service during the tax year as section 179 property. If this election is made, the term "section 179 property" will include any qualified real property that is:

• Qualified improvement property as described in section 168(e)(6) of the Internal Revenue Code, and

• Any of the following improvements to nonresidential real property placed in service after the date the nonresidential real property was first placed in service.

  1. Roofs.

  2. Heating, ventilation, and air-conditioning property.

  3. Fire protection and alarm systems.

  4. Security systems.

You can carry over to 2019 a 2018 deduction attributable to qualified section 179 real property that you placed in service during the tax year and that you elected to expense but were unable to take because of the business income limitation. 

[Rick19744]

While Section 179 may be able to utilized in your situation, you need to keep in mind that your rental property needs to be able to qualify as a trade or business.  This is based on facts and circumstances and is NOT be same as what is used for purposes of Section 199A.

Owning rental property qualifies as a business if you do it to earn a profit and work at it regularly, systematically, and continuously—either by yourself or with the help of a manager, agent, or others. 

Most rentals don't generate a profit, so you need to keep in mind the business taxable income limitation.  This limitation combines all trades or businesses if you have others to combine.  If you aren't generating business taxable income, then the Section 179 will carryover.

You may want to discuss with a tax professional who can help you in this decision process.  This individual may help you determine that these cost may qualify as repairs.

[Carl]

Most rentals don't generate a profit,

That can be misunderstood or misinterpreted by some. It would be more accurate to say that "most rentals don't generate a *taxable* profit while they may generate a cash flow."

For many rental owners they'll find it difficult if not impossible to qualify for QBI.

Your new HVAC is a property improvement, as is the assessment for the new roof.

[AmeliesUncle]

You mentioned a "condo" and depreciating over 27.5 years.  If this is classified as Residential Real Property, those items won't qualify for Section 179 (even if you meet the "Trade or Business" hurdle).  The rule about Roofs and HVACs only apply to NONresidential real estate.

[Rick19744]

Once again, go visit a tax professional who can provide you with some advice.  

There are three areas that need to be addressed as to whether or not the costs you are referring to are a repair which can be immediately expensed or must be capitalized and depreciated.

A capital improvement is defined as an amount paid after a property is placed in service that results in a betterment, adaptation, or restoration to the unit of property or building system.

Are you just re-shingling?  If the answer is yes, then that is most likely not a betterment or restoration.  If you are replacing 20 year shingles with 50 year shingles?  That would be classified as a betterment.  If essentially the same type of shingles, than that is not a betterment.

How much of each roof layer was replaced? If only the outer roof covering (membrane, shingles, etc.) was replaced but none of the underlying roof system, it is not a restoration. If any load-bearing structural elements (including decking and sheathing) were replaced that supported more than 40% of the roof, the entire cost is likely a restoration. If more than 40% of the insulation layer between the roof covering and structural elements was replaced, it may be a restoration.

As you can see, there are many factors in deciding whether or not this is an expense (repair / maintenance) or must be capitalized.

[Rick19744]

@AmeliesUncle that restriction was removed in TCJA for personal property, but agree that it would not apply to roofs and HVAC for residential rental.

One significant limitation on Section 179 is that rental property owners could not use it to deduct the cost of personal property used in residential rental units. The TCJA eliminates this restriction starting in 2018. Thus, starting in 2018, landlords may use Section 179 to deduct up to $1 million in personal property in rental units each year. For example, Section 179 may be used to deduct appliances and furniture in rental units. Section 179 may also be used to deduct improvements to non-residential building roofs; as well as HVAC, fire protection, alarm, and security systems added after the building was first placed in service. However, Section 179 may not be used to deduct the cost of such property in residential buildings.

[NCperson]

wasn't there something I read that "special assessments"  for major repairs needed to be capitalized / depreciated and could not be immediately expensed.    is that right?

In the original thread, the roof replacement was paid for as part of a special condo assessment, but the HVAC was the responsibility of the unit owner.  

[Rick19744]

@NCperson once again, as most things tax, depends on the specific facts and circumstances.

If there is a special assessment that is not attributable to one specific area, then I would tend to capitalize that cost.  If it is for a specific item, such as that mentioned in the original post, I would want to analyze it as noted in my earlier response.  

Let's be clear here, there are always thresholds of gray and individual risk tolerance in the tax arena.  That's why a forum such as this cannot provide the back and forth that occurs when sitting face to face with a tax professional.  This individual can go into much more depth and explain any gray or risk involved and the taxpayer can make a decision based on that discussion.