I renovated a kitchen and two bathrooms and then put a rental property into service. I've read appliances can be depreciated over a 5-year schedule and kitchen cabinets over 7-years.
How are kitchen countertops depreciated? How about bathroom fixtures?
Are there any downsides to using a faster depreciation schedule on the aforementioned items?
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Are there any downsides to using a faster depreciation schedule on the aforementioned items?
Depends on your point of view.
Keep in mind that depreciation is not a permanent deduction. When you sell the property you are required to recapture and pay tax on all depreciation taken. One thing to keep in mind about that.
1. Recaptured depreciation is added to your AGI in the year of sale. This has the potential to bump you into the next higher tax bracket. Weather it does or not, depends on the numbers and some other factors.
Typically, anything that becomes "a permanent part of" the structure is classified as residential rental real estate and depreciated over 27.5 years. Now in my view, built in kitchen cabinets become a permanent part of the structure. But the IRS pubs do state they can be classified differently under MACRS and depreciated faster. (in my personal opinion, that would include new countertops).
However, I prefer to keep my depreciation as low as I legally can, so as to reduce the chance a future recapture will bump me into the next higher tax bracket. Buy that's just my preference. Your preference may (and can) be different.
@Carl Thanks for the rundown. I didn't really understand depreciation recapture. Your post has made me create some mock scenarios in Excel in which I sell the property 10 years down the line.
The depreciation recapture tax rate is going to be very high regardless of what I do now, but accelerating depreciation of cabinets is not helping my wallet.
B/c I am semi-retired and have only interest, dividends, and small rental profits (mandatory depreciation) I am in a very low bracket. Increasing my expenses by depreciating cabinets now, and thereby decreasing my rental income is not really beneficial for me.
Thanks!!!
Carl, help me with this re: depreciable life of kitchen cabinets. You tell us "IRS pubs do state they can be classified differently under MACRS and depreciated faster..." I'm assuming you are referring to cabinets in 27.5 year residential real property, since that is the nature of the discussion. To which IRS pub (or pubs) are you referring? And where in the pub(s) does it state that a different MACRS classification is available? If you can help me find that it would be very helpful. Thanks!
if you take a look at IRS Publication 946 Appendix B, there is nothing there to define "cabinets" as it relates to rental property. Since cabinets become "a material part of" the structure, I'd classify it as residential rental real estate and depreciate over 27.5 years. Keep in mind also that if your total cost is under $2,500 then you can elect the de-minimus safe harbor option and just deduct the cost as an expense - which would probably be better if that option is available to you. For details on that option, start at https://www.irs.gov/pub/irs-drop/n-15-82.pdf
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