How to depreciate a rehab

[John Morgan]

I’m rehabbing my rental and paying my contractor 21k to do it all. How do I depreciate this for tax purposes? Can I depreciate the total amount over 15 years?

[Jack Hildinger]

No.  You must take the remodel and depreciate it appropriately per the tax code.  Do not lump it together, because you will have everything on a 27 yr depreciation curve.

Cost segregation is important.  Structural improvements-tile, laminate, new walls, new roof, shower remodel, toilets, kitchen, electrical etc will depreciate at the 27 year, schedule just like the original structure. A/C heating will be 27 years.  Carpet, appliances (that plug in to the wall) will be 5 years.   Fences- 15 years,   Paint that is part of the remodel will be 27 yrs.   Paint that is maintenance is expensable in the current year-it's a repair.  Don't just depreciate the total-if you do, everything is set at 27 yrs. 

Example: I did an ADU on a house in 2018. Actual numbers from my 2018 tax return:

If I depreciate $43,041for 27 yrs, I will take $1594per year for 27yrs. 

 *OR*

I depreciate $2592 of appliances over 5 years-but with bonus depreciation I can take the entire amount first year. 

I take $625 for a fence over 15 yrs. $78 this yr.

So my 2018 depreciation is $1498+$2592+$78=$4168 of depreciation in 2018. 

Depreciation for subsequent yrs=$1576 for 15 yrs, then $1498 for the remaining 12 years.

If I just lumped it together  $43,041/27= $ 1594 of depreciation.