Where to report new HVAC for a rental?

[kohirkar]

I replaced a Heat Pump in my rental. I believe that I need to report this as Capital Improvement and not as a repair expense. This is more than $2500.  I don't see a section for "Appliances". The only option in TurboTax seems to be "Major Improvements". And the examples for Major improvements do not include new appliances. Please help.

[maglib]

@kohirkar 

To enter your rental improvements, simply follow the directions to enter your rental income and expenses. At some point you'll come across the Rental Summary screen. Select Start next to Asset/Depreciation and follow the onscreen instructions. We'll figure out which depreciation method works best in your favor.

Note: Although it doesn't seem logical, refinance fees and mortgage points are also entered in the Assets/Depreciation section. The IRS considers these amortizable intangibles and accounting rules dictate that those are to be depreciated instead of deducted as an expense.

You may also qualify to expense the asset in the current year as section 179 deductions:

To qualify for a Section 179 deduction, the asset must be:

• Tangible (you're able to touch it, which excludes intangible assets like patents or copyrights)
• Purchased (not leased) for business use
• Used more than 50% in your business
• Placed in service (purchased, acquired, or converted to business use) during the current tax year
• Acquired from a nonrelated party

[kohirkar]

Thank you for responding. This is what I am trying. When I get to the assets section I first get the question is the expense less than $2500, in my case it isn’t. The next screen is asking about “ Major improvements “. I tried using this but it shows a screen that wants me to put in which building I improved. I moved beyond this and then I go to the summary page where I can edit assets.

I don’t see a page where I can enter appliances above $2500.

thanks

[maglib]

@kohirkar  scroll down to the bottom of the screen where you can edit assets, there should be an option to add an asset.

The building improvements screen, if you continued through that you probably would have gotten to the right screen to add too as rental appliance.

Let me know if it works. I had no assets myself to enter this year.

[kohirkar]

I tried the same thing this morning and it worked. Thank you.

[maglib]

@kohirkar  please mark answer as solved so you won't get follow up emails.

[AmeliesUncle · Accepted solution]

HVAC is considered as part of the actual property itself, not as an "appliance".  It would need to be depreciated over 27.5 years (assuming this is residential rental property in the US).

[maglib]

The CARES Act contains several tax savings benefits for businesses, including specific terms for HVAC and HVAC depreciation life – with the goal of enhancing Indoor Air Quality (IAC).  And Rental properties qualify as a business as we found with 199A

For example, under Section 168 of the tax code, the cost of all equipment and components of the “heating, ventilating, and air conditioning system” may be fully deducted for tax purposes in the first year. The CARES Act reduces the depreciation schedule to 15 years and creates a bonus depreciation that allows the taxpayer to take a full deduction of certain costs in a single year. The 100% bonus depreciation applies to qualified property acquired and placed in service before January 1, 2023*.

@AmeliesUncle "The CARES Act permanently reduces the depreciation schedule to 15 years and creates a bonus depreciation that allows the taxpayer to take a full deduction of certain costs in a single year."  

Tax Cuts and Jobs Act (TCJA), P.L. 115-97, makes HVAC costs eligible for expensing under Sec. 179

[AmeliesUncle]

@maglib  I'm not sure where you are citing that from, but it seem quite out of context.

Yes, HVAC for NON-residential real property qualifies for Section 179, so it can be fully taken in one year.

No, HVAC was NOT directly changed to 15 year property.  That is referring to Qualified Improvement Property, not HVAC.  

Under certain circumstances, Qualified Improvement Property could possibly include HVAC, but that is only for NON-residential real property.

[maglib]

@AmeliesUncle  https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses

"The general depreciation system recovery periods are still 39 years for nonresidential real property and 27.5 years for residential rental property. The alternative depreciation system recovery period for nonresidential real property is still 40 years. However, TCJA changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years. Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and given a special 15-year recovery period under the new law."

As per review from numerous CPA journals: The Act also allows bonus depreciation and a 15-year recovery period for an expanded class of property improvements, such as building interior renovations, roofs, ventilation, heating and air conditioning systems, fire protection, alarm systems, and security systems now qualify as 15-year property.https://www.frazierdeeter.com/insights/irs-clarifies-new-rules-for-bonus-depreciation/#:~:text=The%2....

[AmeliesUncle]

The author of that article is wrong.   He seems to be garbling the rules for Section 179 for those items with the number of years for Qualified Improvement Property.

With that being said if it were Nonresidential Real Property, some of those items could possibly fall under Qualified Improvement Property.  But none of that applies to Residential Rental Property.

[maglib]

It was also in  AICPA Today..    Rental property may now qualifies as business under new rules

Then there also always a way to change depreciation methods if using reasonable life based upon history, although you should get approval. Examples HVAC on a roof in Florida do NOT last 15 years, if you can substantiate your depreciation utilized, you can get approval normally and if you don't get it authorized, just hold documentation if needed for substantiating what and why you did something.

[maglib]

@AmeliesUncle   IRS direct https://www.irs.gov/irb/2022-07_IRB#REV-PROC-2022-14

"(vii) if the taxpayer is changing the classification of an item of property from § 1250 property to § 1245 property under § 168 or former § 168, a statement of the facts and law supporting the new § 1245 property classification, and a statement containing the following representation: “Each item of depreciable property that is the subject of the Form 3115 filed under section 6.01 of Rev. Proc. 2022-14 for the year of change beginning [Insert the date], and that is reclassified from [Insert, as appropriate: nonresidential real property, residential rental property, qualified leasehold improvement property, qualified restaurant property, qualified retail improvement property, qualified improvement property as defined in § 168(e)(6) (as amended by § 13204 of the TCJA), 19-year real property, 18-year real property, or 15-year real property] to an asset class of [Insert, as appropriate, either: Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc. 83-35, 1983-1 C.B. 745] that does not explicitly include § 1250 property, is § 1245 property for depreciation purposes.”"

[AmeliesUncle]

Do you have a link to the AICPA article?

Your second response (with a link to Revenue Procedure 2022-14)  does apply to what we are talking about.