topic Deducting expenses after depreciation has "run out" on rental property in Investors & landlords

Deducting expenses after depreciation has "run out" on rental property

CaddyGrn — Tue, 25 Feb 2025 19:25:22 GMT

We live in a large home, and 1/2 of the house was converted to apartments (2 of them) years before we owned the property. We live in one part of the home and rent out the apartments. We have depreciated the apartments over the years, and if I recall correctly, the depreciation was good for 27 years. We are on year 24. No plans on moving, however, during the past we refinanced the building (home) part way when loan interest went way down. I am trying to determine what I can and cannot deduct once we have passed the 27 years of depreciation, even though our mortgage will still need to be met. For example, if we paint the house, do I only get to depreciate the cost of the apartment portion for the years left on the depreciation schedule, or is there some way to continue to spread out the cost over time as far as taxes are concerned? If I wait and paint the house after I have depreciated out the apartments, can I deduct the full amount for the portion of the apartments? Normally, large things like that have to be depreciated over time, so I don't know how this would be handled. Any advice or insight will be helpful; thank you in advance.

Re: Deducting expenses after depreciation has "run out" on rental property

PatriciaV — Tue, 25 Feb 2025 21:05:12 GMT

It depends on whether the work is an improvement that extends the life of the building or is a repair/replacement of existing building components. Any costs for this work would be allocated between your personal residence (not deductible) and the rental units.

An improvement is recorded as a new asset for your rental property and would be depreciated over 27.5 years, the same as the main residence. See Table 1-1 from IRS Pub 527 Repairs and Improvements for examples of improvements.

However, you may be able to write off the improvement costs if you qualify for the Safe Harbor Election for Small Taxpayers. TurboTax will ask you about this election under the Assets/Depreciation section of your Rental Property. If you choose this election, you can expense up to $10,000 in costs that would otherwise be depreciated over a very long time.

A repair/replacement is expensed in the year the work is done.

Once the main residence is fully depreciated, nothing will change except you no longer have depreciation expense to deduct from your rental income. If you sell the property, the depreciation you claimed could factor into the taxable gain on the sale.

Re: Deducting expenses after depreciation has "run out" on rental property

CaddyGrn — Thu, 27 Feb 2025 20:34:23 GMT

Thank you for your response. I am unsure if I am clear, so let me provide an example. Let's say the depreciation of the building had reached 27 years. 1/2 of the building is dedicated to apartments, and I understand improvements that affect the entire building are only partially deductible for the apartments. If we paint the building (which would be a significant expenditure), would that 1/2 portion for the apartments still be able to be depreciated for 27 years? This would be an improvement to the building ~ but a paint job wouldn't last 27 years... This means we would get a little yearly as long as we own the building.

I understand the recapture of the depreciation upon the sale of the property. Let's say we put new appliances in one of the apartments after year 27. If higher than the threshold, would this be depreciated over 27 years? It would be completely different appliances than previously. I think this would be the replacement of items.

As you pointed out, "Once the main residence is fully depreciated, nothing will change except you no longer have depreciation expense to deduct from your rental income." Does this mean that improvements to the building are no longer depreciated?

Thank you in advance for clarification on my mush-filled brain.. 😜

Re: Deducting expenses after depreciation has "run out" on rental property

PatriciaV — Mon, 03 Mar 2025 21:29:43 GMT

Painting the building would not be an improvement. This is an expense that would be split between your residence and the rental property. If you installed siding or added a porch, those would be improvements that would be depreciated over 27.5 years.

Appliances have a shorter depreciation period, although you may be able to expense them fully under the Safe Harbor Election.

Rental Assets stand alone. Even if one asset is fully depreciated, the remaining asset continue to be depreciated over their useful lives.

The links provided earlier will answer many of your questions about depreciation for rental properties.