@Derrick Lumsden "Is the depreciation basis the cost of goods, or cost of goods plus installation?"
Cost of boiler, sales tax, plus all costs associated with getting it ready for operation.
"Finally, will I have a choice between repair or depreciation?"
You bought a brand new boiler to replace an old one? Curious how you're going to argue this is a repair?
Generally the boiler would be depreciated straight-line over 27.5 years (assuming residential RE) using mid-month convention, but there are options for expensing. This may even qualify for a tax credit depending on the answers to a Q&A conversation.
Your CPA knows your facts, circumstances, and goals and will be best equipped to help you with this.
@Eamonn McElroy , thanks for the information. I guess I showed my ignorance here.
"Finally, will I have a choice between repair or depreciation?" Thanks for correcting me.
Also, I thought there was some room as to depreciation schedule, but once again looks like I was mistaken. It can only be depreciated at 27.5 years, is that correct?
@Derrick Lumsden "It can only be depreciated at 27.5 years, is that correct?"
"Generally the boiler would be depreciated straight-line over 27.5 years (assuming residential RE) using mid-month convention, but there are options for expensing. This may even qualify for a tax credit depending on the answers to a Q&A conversation."
Originally posted by @Derrick Lumsden :
I am wondering if anyone would share their opinion or even expertise on depreciation vs repair.
I just had an old HVAC boiler replaced for $3900 including labor.
I know depreciation would cost out the expense over a number of years. Is there a standard depreciation time frame for this kind of capital improvement? Are there options?
Is the depreciation basis the cost of goods, or cost of goods plus installation?
Finally, will I have a choice between repair or depreciation?
Given my financial position, I suspect it will be most valuable to me to depreciate over 3-7 years rather than through repair.
(Don’t worry, I do have a CPA, and I will talk to him about all this. I just searched the forum and couldn’t find a depreciation post that really answered these questions—maybe I am search incompetent—so I thought it could make a good thread.)
If your total repair plus improvement for the year is less than 10k or 2% of your building basis, you can expense it this year under Small Tax Payer Safe Harbor.
Boiler life expectancy depends very much upon the type of boiler that you purchased. The average expectancy of a traditional gas boiler is between 10 and 15 years, if you keep it well maintained and have it serviced annually. Other boilers, such as electrical devices, will last between 8 and 10 years.
We do not know anything about the property or the rest of your portfolio, so it's hard to answer. If it was a nonresidential property (like a warehouse) - then it can be deducted in full. But it's likely a residential property, so this option is out. I will also assume that the property has already been placed in service before the boiler was replaced. Then, here're the options:
1. Safe and standard: depreciate over 27.5 years.
2. Debatable: treat it as an appliance with a 5-yr life, including an option to write it off completely as such. I have seen arguments along these lines, but I personally do not believe they hold water. I do not recommend going there.
3. Worth checking: the small taxpayer loophole mentioned by @Ashish Acharya . It might work for you if (oversimplified)
- your total portfolio is under $1 mil and
- your cost for this entire property is $200k or more
- you did not do other work on this property this year (if you did, then the property should cost more than $200k)
Run it by your CPA. If you qualify for this loophole - then you can write it off in one year.
I'm unaware what other "options for expensing" mentioned by @Eamonn McElroy exist.
PS. The life expectancy of the boiler is irrelevant for taxes.
I primarily had in mind the 'Small Taxpayer Safe Harbor Election', which has already been mentioned and is dependent on OP's basis in the building.
If the building is non-residential it's possible he could S179 the boiler under IRC Sec 179(d)(1)(B)(ii) and IRC Sec 179(e)(2)(B) as long as (1) we can properly classify OP's rental as a 'trade or business' and (2) he has net taxable income to take the S179. If the Service ever issues the technical correction that 100% bonus applies to Qualified Improvement Property (QIP) we'd have a second option for federal 'expensing' for non-residential real estate. I don't think this is likely to happen soon, and probably not before 4/15 as they have quite a lot of irons in the fire now.
Businesses with a ton of QIP that are phased out of S179 may need a conversation with their CPA about extending.
Usually the tangible property expensing elections are preferable to S179, which is preferable to bonus.
I held back naming all of these initially because there are qualitative factors as well as quantitative factors involved in the decision. The OP's CPA is best equipped to have the conversation with OP as he'll/she'll know the facts and circumstances and what OP qualifies for and what doesn't.
You noted it's hard to answer this question without a holistic view of OP's tax situation. I agree, and that was my initial mindset with my original posts. It's not doing OP nor his CPA a favor to say "these are what your options are" when we don't know the facts and circumstances. What if his basis in the building is $100k? That is certainly plausible in some markets...
OP also mentioned that he believes he won't benefit from immediate expensing, but from intermediate term depreciation. That's a planning aspect that needs to be considered.
Agreed on all points. I was just wondering if you had something else that I overlooked.
@Ashish Acharya , hey thanks for the details. The boiler was less that 10k but about 8% of basis. Is it either/or or is is the determination 10K or 2%, whichever is less?
@Sam Shueh , thanks for clarifying expcted life. I haven't gotten that far down the rabbit hole to really manage my capex like that yet, but I really want to get there.
I would love to be able to depreciate it on that basis, but I am hearing I don't have that kind of choice.
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