I'm fairly new to real estate and have quickly learned that the IRS gives us investors a lot of breaks but it comes at a price. The last few hours have been spent wandering around in a quagmire of IRS Publications that have caused the death of extremely valuable brain cells. (I'm running on a deficit already)
My rentals are all BRRRRs and it seems some of the cost of the (R)ehab fall under the accelerated depreciation category. So far I have not found a list, suitable for those of us that are brain cell deficient, that lays out what can or can't be put into this category. I'm thinking things like the new appliances are in the 5 to 7 year category and the new AC can be straight lined for 15 years?.
Does such a list exist?
Is there a nuts and bolts article on BP that has applied the KISS (Keep It Simple Stupid) method to the IRS Publications for those of us do not view the IRS Codes as a challenge?
If so I would really love to see it before I go completely numb from the neck up.
Thanks for taking the time to read.
Here is the IRS guide on cost segregation:
You probably won't want to read through all those pages! :)
If you are not working with a CPA, you are doing yourself a disservice and should hire one ASAP.
What do you mean? The IRS publications should provide you a very clear picture of depreciation. JUST KIDDING the depreciation topic for reason has technical books that are 500 pages thick. You are never going to get those hours back.
It is complicated.
It is impossible to tell you everything here.
In general, you will have to capitalize the cost that you incurred before renting the property unless you qualify for something called de minimus safe harbor where you can expense items below $2500. Taking this election on the property you are rehabbing has to be planned and well documented.
Other that than you would depreciate your property under 27.5-year straight-line basis, no accelerated depreciation. (Unless Cost Seg)
If you add an appliance after you put the property in the service, you can take 100% bonus depreciation on those assets, if you want to. It is not always beneficial to accelerate your depreciation. You need to talk to your professional about your income level, goals, and future expectation to draft proper depreciation election if available.
Unless you do your own cost seg yourself, sometimes it might not be worth doing it because of the expenses. Most of the cost seg firm will provide you cost-benefit analysis for free if you want to talk to them. Also, be mindful that with new law change of allowing the 1031 exchange only for the real properties, the cost seg might be harmful depending on if you want to ever do 1031 exchange. Of course, there can be planning done to see what is most beneficial to you.
Keep on exploring and asking :)
Quick and dirty answer to your question.
If you were able to take the roof off your dwelling structure, pick it up and turn it upside down, everything that falls out would be personal property (free standing appliances, furniture, area rugs, are examples) that could be depreciated over five years. Everything else inside the dwelling structure is a structural component that would be depreciated along with the structure itself on a 27.5 year schedule. This would include the water heater, central air conditioning system, heat pump system, built in applicanes, etc. If the "air conditioner" you referred to in your post is a window unit that would fall out when you turned the house upside down, then it is 5-year personal property; otherwise, 27.5-year property
Landscaping and ground improvements are 15 year property that would include driveway and sidewalks.
For a single family rental, a cost segregation study is most likely more expensive than your tax savings could ever recover through accelerated depreciation. Please note, that the appliances that you want to depreciate can be depreciated separately from the property if you purchased them new during your renovation. Appliances that came with the property would have a depreciation basis at their thrift shop value which tends to negate the value of a cost segregation study.
@Tony Roddenberry you can get a CSS for SFR with $500-600 and that expense value vs the accelerated depreciation you get is something for you to judge how it plays in your larger tax strategy. Keep in mind, is an acceleration of depreciation, not a tax saving.
The depreciation goes from a constant linear to a bulk in first years, and less in later years. So, it will give you bigger deduction, and because of that, potential bigger "tax saving" in the first years, but you'll get less later too. You might want that in the first year as it increases your cash flow in a period when usually propriety performance is weak and the cash flow is lower (and that could be useful in financing/refinancing said property). But it will also affect how you recover said depreciation in later years if you plan to sell or exchange. You'll get some additional benefits with a CSS if you replace an item as you'll be able to claim loss deduction, and also your heirs might benefit if they inherit a property with CSS (too bad you have to die for that though).
And then there is the question of the value of money now, vs in the future, or the future value of invested tax saving.
So, now that I gave you (most of) all the balls, try and juggle them all in the air and see how it goes for you.
I can tell you I choose to spend the money and get CSS for two of my SFR rentals.