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HVAC and appliance put in service for a Rental the same year as Sale

I updated HVAC and an appliance for my rental in March of 2022 and sold the property in Nov 2022. I rented the property through Oct 2022. I know there is no depreciation for the HVAC and appliance since I am selling the property within the year. My question - do I add the HVAC and appliance cost to the rental asset section and prorate my gains across these assets  similar to the other assets for the Rental, or do I capture them as an improvement and add the amount to the cost basis? I have tried both methods in TT, and the Tax is couple of hundred dollars higher when I add it to the asset section, because TT treats the gain from the HVAC and appliance as ordinary gain.

 

The difference is small, but I want to file my taxes right. Any help will be appreciated!

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4 Replies
JamesG1
Expert Alumni

HVAC and appliance put in service for a Rental the same year as Sale

Perhaps the items that you purchased will qualify for one of the two De Minimis Safe Harbor Elections.  If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

 

This election is an option you can take each year that lets you write off items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does.

 

Improvements can seem very similar to expenses. You paid for an improvement to your rental property if you spent money to enhance your property, restore your property, or adapt your property to a new or different use.  Examples of improvements include:

 

  • Installation of new plumbing or wiring
  • Addition of paneling to a room
  • Installation of a fence
  • Paving of a driveway
  • Installation of new cabinets
  • Addition of a new roof
  • Assessments for streets, sewers and sidewalks

After making the election, the expenditures may be reported as Miscellaneous expenses.

 

In TurboTax Online Self-Employed, follow these steps:

 

  • At the screen Your 2022 rental and royalties summary, select Edit to the right of the rental activity.
  • At the screen Here's rental property info, select Add expense or asset.
  • Add Improvements, furnishings and other assets.
  • At the screen Your improvements, furnishings and other assets, select Edit to the right of Annuel safe harbor elections.

@IreneS explains the two elections here.

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HVAC and appliance put in service for a Rental the same year as Sale

@JamesG1 ,  The install cost for the HVAC is around 10K. I understand how  improvements are added as assets in the Rental section and what the usual rental expenses are. I have reported rental activity in TT for several years. The question arises from the fact that I installed the HVAC in March 2022 when I had a renter and sold the property in Nov 2022. In my situation, there is NO depreciation of this asset (since it was installed and removed in the the same year - and TT does not calculate it either). So, do I still enter the HVAC as an asset and then prorate my gains from the sale of my rental property for the HVAC ? Or so I capture it as a capital improvement and add it to by cost basis for the rental and then come up with my actual gains from the rental sale?

Execudiva
New Member

HVAC and appliance put in service for a Rental the same year as Sale

The HVAC is, and should be entered as a capital improvement regardless of the year it was put into service.

HVAC and appliance put in service for a Rental the same year as Sale

@Execudiva , The question is not whether the HVAC is a capital improvement or not. It IS a capital improvement. The questions is HOW and WHERE you enter them in TT and report the sale of Rental property. If you have placed an asset in service for your rental, you are required to depreciate the expense across several years (typically between 5-27.5 years) depending on the type of asset. When you sale the rental, you are required to prorate the gains across all assets when you sale the property and capture the depreciation taken in prior years.

 

My question is do I need to prorate the gains from sale of my rental for the HVAC, or just add it to the cost basis of the rental. Note that in TT there is  only one line for ALL Capital Improvements and Expenses when you sale the Property. Other that your own calculations, there is no place on the actual forms where there is a breakdown of what is included in the adjustment of the basis.  So, I want to just know the right way to do this; there isn't any material difference in the tax  Hope this explains.

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