Can I depreciate improvements to a Farm Housing asset (Sch F)?

[thomas-clarry]

Working on Sch F. Acquired farm housing asset in 2015 for $7800. Used Sec 179 for deduction. Spent $28,500 in 2016 to improve. What are my options for deducting these expenses?

[Cattlerancher]

Great question, I'll be glad to help research it. Is this farm laborers tenet housing? Can you describe the building? Does it have a concrete foundation? Wood/stick built housing for long term use or is this a house trailer/manufactured home?

[thomas-clarry]

The house is an 80 year old, stick built, wooden farm house.  The $7800 expense (used Sec 179 on 2015 tax ) was the cost to move the house to our property and place it on a pier foundation.  It is not a trailer/manufactured home. It is intended for long term use.  Plans include tenet housing and/or a Bread & Breakfast type rental.  The $28500 spent in 2016 was for things like electrical rewire and hookup, plumbing redone, new roof, septic system, HVAC, etc. Is "Safe Harbor" option feasible.  TurboTax states that one should think carefully about invoking this option because it affects your options going forward and is difficult to reverse.

[thomas-clarry]

Cattlerancher, thanks for response.  You stated "The $7,800 moving cost SHOULD have been applied to the basis of the house along with this $28,500 renovation cost." This sounds like I will have to undo the 2015 Sec 179 deduction for the $7800 moving expense and start depreciation on 2016 return.  Is this possible?  Is my understanding correct? Can I use the $28500 as the basis for depreciation?

[Cattlerancher]

I would amend the 2015 tax return (to retract the Sec 179 $7800 deduction). If you have "placed the house into service" in 2016, I would add the $7800 plus the $28500 together ($36300) as the cost basis to begin depreciation. I highly recommend reviewing this IRS publication 551. I've provided a link below;

 <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p551.pdf">https://www.irs.gov/pub/irs-pdf/p551.pdf</a>

[Cattlerancher · Accepted solution]

The De Minimis Safe Harbor Election is not an option here as it applies only to assets with a cost basis of $2500 or less.

The $7,800 moving cost should have been applied to the basis of the house along with this $28,500 renovation cost. Once the home is finished and placed into service as either farm employee housing or as a Bed & Breakfast you can begin depreciating it over a useful life of 27.5 years. Section 179 does not apply. Trailers use a shorter useful life.

House trailers for farm laborers.

To depreciate a house trailer you supply as housing for those who work on your farm, use the following recovery periods if the house trailer is mobile (it has wheels and a history of movement).

A 7­ year recovery period under GDS.

However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use the following recovery periods.

A 20 ­year recovery period under GDS.