I'm not sure what the best way to handle a new water heater purchase in 2024 if I might sell this property in the next couple years. Should I deduct the full amount now?

[john-luoma]

I bought this water heater 12/30/2024. The recommendation on the deduction is confusing to me. Please advise.

[Opus 17]

If you are a personal homeowner (not a landlord) then purchase of a new hot water heater is not a tax deduction.  It might be eligible for an energy efficiency credit of up to $600 (for a conventional hot water heater) or up to $2000 (for a heat pump hot water heater) if it meets the required energy efficiency standard as shown in the instructions.  (You may have to contact the manufacturer to find out if it meets the required efficiency standard.)

https://www.irs.gov/forms-pubs/about-form-5695

You claim the credit when the unit is placed in service (installed), regardless of when you pay for it.   Because it is a home improvement, the net cost (after any rebates and credits) increases the adjusted cost basis of your home and may reduce your capital gains when you sell.  

There is no reason to not claim the credit, if you are eligible, even if you plan to sell your house soon.

If you are a landlord,

You place the property in service and begin depreciating it when it is placed in service.  When you sell, you must recapture any depreciation you take or could have taken, so you should list it as an asset even if you plan to sell the house soon. 

[john-luoma]

thanks for the reply.

To clarify, I am a landlord.   The water heater was purchased 12/30/2024.   A couple more questions on this....

1.  How do I classify the water heater in the asset section?  There are many options and its not clear how to add this to the asset list.  Also, one of the options is to take the full deduction now.  Is this a good option?   Water heaters typically last 10-15 years.   What depreciation option should I use?  Certainly not 27.5 years, right?

[Opus 17]

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@john-luoma wrote:

thanks for the reply.

To clarify, I am a landlord.   The water heater was purchased 12/30/2024.   A couple more questions on this....

1.  How do I classify the water heater in the asset section?  There are many options and its not clear how to add this to the asset list.  Also, one of the options is to take the full deduction now.  Is this a good option?   Water heaters typically last 10-15 years.   What depreciation option should I use?  Certainly not 27.5 years, right?

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I'm not super knowledgeable on this, but I can add some thoughts.

@AmeliesUncle @Hal_Al @rjs 

There are two safe harbors for small businesses, if you qualify for one of them, you can deduct the entire cost as an expense rather than depreciate it as an asset, then you don't have to recapture depreciation if you sell.  The simple safe harbor allows you expense an item under $2500.  If it is more than $2500 but less than $10,000, you can look at the Safe Harbor for Repairs and Improvements.  Turbotax should offer these safe harbors if you are eligible. 

https://www.nolo.com/legal-encyclopedia/small-taxpayer-safe-harbor-for-repairs-improvements.html

If you list the property as an asset, I believe you are stuck with the 27.5 year depreciation.  However, if you kept the house and the heater needed to be replaced early, you roll up the remaining depreciation at that time.

Generally, the only reason you would not take the expense is if it creates a loss that you can't deduct, that's a time when you might get more benefit over time by taking depreciation.  But you still have to recapture depreciation, so I think the safe harbor expense will be better for most landlords.  

[AmeliesUncle]

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@Opus 17 wrote:

There are two safe harbors for small businesses, if you qualify for one of them, you can deduct the entire cost as an expense rather than depreciate it as an asset, then you don't have to recapture depreciation if you sell.  

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Opus's answer is great and I agree with it.

The comment about depreciation recapture is misleading though.  It may not be depreciation recapture, but it is still reported as a sale (just as if it was a depreciable asset) and the gain is taxable at ordinary rates.  See the Instructions for Line 10 of the 4797 Instruction.