First, when figuring the Capital Expenditures for improvements, and their ages, is there a standard age range for certain things, such as 10 years for flooring, 20 years for windows, etc... or are you expected to be reasonable in your estimate of how long something lasts?
Second, are you giving the items an actual cost value, or a replacement value? Example: I installed all new windows in a house for $1200. My labor, my material, etc..., am I limited at putting the CAPEX cost on windows at $1200, or can I put $4,000, because if I was to hire someone to do it, that's what it would cost?
Are you asking this your deal analysis/ forecasting or for tax-related matter?
I'm brand new at this, so right now its for taxes (although 2017 there was no income so even though its all a loss, there is no real estate income to put it against) so I'm guessing it won't actually help until next years taxes (for 2018 year).
But i'd also like to know just to know, because it may be worth while to spend a little extra on some things if it will be worth more over the long run in terms of the yearly write off. (I assume thats what you mean by deal analysis?)
Still can't answer your question. Can you please tell us when did you buy a property? How do you have a loss? Did you repair it?
There can be so many cases and cant answer without what happening on your end.
Are you asking if the improvements done to the property is deductible or depreciated?
Does no one do capital expediture depreciation on their taxes? If you put new windows in for $10,000, you probably claim a certain dollar amount for a certain number of years, right? Like 500 a year loss (depreciation) for 20 years?
I ask my accountant with specific questions but there is generally up to a dollar value when expensing (deduct fully that year) or capitalizing (add to the cost basis and depreciate). The amount is always the amount paid.
If you are increasing the cost basis of the house by installing windows, then that would depreciate at 27.5 years, the same as the house.
The cost basis of the property is split between land and building. The building depreciates, the land does not.
@Bobert M. It all depends on what it is. Different assets will have different depreciable lives depending on what they are, where they are and how they're installed plus a bunch of special rules. For rentals the cost of the property and improvements would be split between the 27.5 year rental property (everything structural or necessary for the general operation and maintenance of the building), 15 year land improvements (basically everything outside the building not attached to the building), 5 or 7 year personal property (anything inside that isn't 27.5 year, this is the tricky part as a number of factors determine if an asset qualifies as personal property) and non depreciable land.
As for your other question your basis for the improvement has to be the actual cost, so no you can't say those $2,000 windows cost $5,000 because that's what the labor cost would've been but you did it yourself for free. If you actually got them done for $5,000 you can add $5,000 to your basis. If you got them for $2,000 and installed them at no cost you can add $2,000 to your basis. In either case with the windows it's a 27.5 year asset since it's part of the structure.
Some thing you can expense vs capitalize if it's under $2,500 it can fall under de minimus rules. All this means you need to talk to a professional to get advice on your particular situation. Find a good real estate CPA and go through it with them. My firm figures depreciation from an engineering standpoint and it's pretty complex. The thing with replacing assets such as windows is you need to remove the cost of the old windows from the basis before adding the cost of the new windows. You have no way of doing that without talking to an engineer or having the original construction invoices for the old assets.
All the rules on this are several hundred pages of tax code. You can read it yourself but it's very dense, very boring, often doesn't make sense and the info you want is buried in a bunch of stuff that doesn't apply to you. That's why there are CPAs and specialists like myself (I'm not a CPA) to help people figure all this stuff out.
Hope this helps, let me know if you have other questions. Feel free to PM me.
@Paul Caputo Yes this helps. I am working with a new CPA this year who says he knows real estate, but before going with him, I talked to 2 other CPA's who said they knew real estate and then was warned against them by other real estate professionals because it appeared they did NOT know real estate. Its hard to find someone who knows all the ins and outs and that why I'm relying on biggerpockets for this year and years to come, for the times when my CPA tells me one thing, but I read something drastically different online. But again, yes, your answer helps greatly. Thank you!
If we are talking about a residential rental property, the replacement things you are asking about, roof, plumbing, HVAC, etc., are structural components of the dwelling structure and would be added to your cost basis and depreciated on the same 27.5 year schedule as the building. If you need to do any repairs to a newly acquireed rental property to make it rent-ready, then those repairs are also added to your cost basis and depreciated along with the building once the property is in service as a rental.
Yes, there is a standard "class life" for all the structural components of a residential rental unit specified by the IRS -- 27.5 years. Depreciation is calculated from your actual cost, but can not include your own labor. Spend $1200 on new windows and install them yourself, your actual out of pocket cost is $1200 and that is the depreciation basis for those windows.
Even though the class life is 27.5 years, all seasoned landlords know that some structural components have a shorter economic life. The roof may be a 25-year asset, the water heater may only las 12 years, and the HVAC may need to be replaced in 15 years. For this reason, you need to estimate the actual useful life for certain major replacement items and establish a replacement reserve fund so you have the cash set aside when you need ito do a major replacement. For example, if you check the manuvacturers tag on the water heater and see that it is already five years old when you bought the rental, and guess that you will need to replace it in seven years. You price the cost of replacement and professional installation at $1000. Over the next seven years, you add $12 each month to your replacement reserve fund for a new water heater. Do the same replacement cost contribution for all the the other major systems you might reasonably expect to replace on a predictable schedule.
Once your property is in service as a rental, there are some low cost replacement items that can be expensed in full rather than depreciated, but this is a conversation to have with your CPA when the occasion arises.
Hope this helps.