Depreciation of Cap Ex

10 Replies

My question is about depreciating capital expenses.

I understand that I depreciate the building over 27.5 years.  I have also been told that capital expenses must be depreciated rather than claimed as expenses.  But how?  Do you just add the cost of the cap ex to the basis or is each cap ex depreciated separately?

@Jim Macedon , talk to your CPA about this. I believe this was changed under last year's tax "reform" bill, but may not have been a permanent change.

If I remember correctly, you can take the CapEx as expenses or 50% or something like that.

Originally posted by @Jaysen Medhurst :

@Jim Macedon , talk to your CPA about this. I believe this was changed under last year's tax "reform" bill, but may not have been a permanent change.

If I remember correctly, you can take the CapEx as expenses or 50% or something like that.

 Unfortunately, that’s not true. 

You have to depreciate cap ex as separate asset over 27.5.

If your expense is below 2500, you can expense it.

If your entire cap ex plus repair for the year is below 2% of your adjusted basis maxed at10k, you can  expense it as well. 

Also, not all repairs or purchase are capex. Make sure you are getting all the deductions.

Okay, so to clarify so I am 100% sure what you're saying:

Say my basis is $100,000

I spent $5,000 on a cap ex, say a new roof.

I just add $5000 to my $100,000 basis to create a new basis of $105,000 and my depreciation is now $105,000 / 27.5 = $3818, correct?

Or do you itemize it somehow on the tax return:

$100,000 / 27.5

and

$5,000 / 27.5

And lastly, you have to depreciate everything based on 27.5 years?  I think in the commercial world you can depreciate things based on some chart that lists how long something is "supposed" to last.  Like you could depreciate carpet over 5 years or whatever.  

If you have to just divide by 27.5, wouldn't that highly discourage you from improving your property if you're, say, 25 years into owning it?

This is why you need to work with your CPA.

Capital purchases have different rates of depreciation.  Some things are depreciated over 3 years, some over 10, etc.  Roofs, vehicles, furnace, etc are each depreciated on their own schedule as defined by the IRS.

Originally posted by @Karen O. :

This is why you need to work with your CPA.

Capital purchases have different rates of depreciation.  Some things are depreciated over 3 years, some over 10, etc.  Roofs, vehicles, furnace, etc are each depreciated on their own schedule as defined by the IRS.

Okay, that's what I thought, but I have not been able to find that chart.

The rules are very confusing. For example, a water heater that had an expected lifetime of 15 or so years is depreciated over 27.5 years because it's part of the plumbing system. Window treatments are depreciated over a small number of years, but only if you're doing a bunch of them. Just replacing one you can expense. If you are making a bunch of improvements before you make the unit available for rent, you can include it in the cost basis and depreciate over 27.5 years, but you may not want to. Generally speaking, the earlier you can deduct the better. This is why it's best to talk to an accountant. Totally worth what they charge to avoid trying to dig into all the details yourself.

Also, you can only depreciate the building, not land. You have to break out the purchase price into building and land. The easiest way to do so is based on the percentage of each in the most recent year's tax records.

Do you utilize your CPA all year round or just during tax time?  I did have a CPA do my taxes for several years, but it still felt like I was doing all the work myself and submitting it to her.  She never really seemed to have any advice or knowledge to share.  This past year I decided to just do it myself on Turbo Tax and see what happened.  Turbo Tax actually found several deductions for me that my CPA wasn't claiming.

I guess just wrong CPA....  Just wondering what your level of interaction is with yours though and what they charge for that interaction.

@Jim Macedon Depreciation is pretty complicated. The proper way to have it all done is a forensic engineered cost segregation study, but on a single small rental property the cost-benefit sometimes doesn't make sense. A study would give you the cost basis and proper depreciation schedule (5 year personal property, 15 year land improvements, 27.5 year real property, while other schedules exist I've never seen a rental with any 3 year or 10 year property those are more specialized) for each asset. 

For this simple example of the $100k building and the new $5k roof you'd have two assets, the building and the new roof. Both are 27.5 year, but the in service dates are different. Say you bought the rental in January 2017 and put on the new roof in January 2018, you'd only have 26.5 years left on the building when you start the 27.5 years for the roof. Make sense? So if you improve the property 25 years into owning it those new assets get a new schedule.

The problem with this is what about the cost of the old roof that you tore off? You're technically still depreciating the old roof since its cost is entangled with the whole building. Depreciating retired assets is technically tax fraud. There's right around zero chance you'd get in trouble for that since the IRS has much bigger fish to fry. 

And there's not really a chart of what qualifies for shorter depreciation, it's more like "assets used in distributive trades and professional services, not including section 1250 assets." are 5 year assets. There's a 6 part test used to determine if something is section 1245 or section 1250, so again it's a bit complicated.

FYI - You can actually get a cost segregation report for SFR rental properties under 500K for $400-500.