De Minimus Safe Harbor HVAC Question

[Nancy B.]

Single family rental property was bought a few years ago for $42,000.

In 2018, furnace and air conditioner were replaced at the same time. They were listed as separate line items.

The air conditioner was about $2700. The furnace was about $2300.

Can I expense the furnace under the de minimus safe harbor election (because it was less than $2500), and then capitalize the air conditioner (because it was more than $2500)?

[Eamonn McElroy]

We're in agreement.  Perhaps my wording was poor.  How about this: First we analyze if there is an improvement to the HVAC building system, taking into consideration the B.A.R. tests and treatment under DMSH.  If we find there is an improvement to the HVAC building system in that context that must be capitalized, that improvement is an improvement to the building.

Example: $2,000 for a new furnace.  $3,000 for a new plumbing fixtures and pipe replacements.

Expense the $2,000 for books and taxes under the DMSH.  The $3,000 is capitalized as an improvement to the plumbing system and thus the building (27.5 / 39 year asset under MACRS).

Right?

Take a read through the Treas Reg §1.263(a)-3 and provide your citations if you have something different.