Impact of upgrades on tax/depreciation

[Kumar Gaurav]

Hello,

I am trying to wrap my head around the concept of depreciation. Let's say I upgrade my HVAC to replace old if install new condensation units worth $10000 just for the sake of numbers, how does it impact my depreciation

What section of tax returns has information about depreciation.Appreciate your inputs

Thanks.

[Michael Plaks]

@Kumar Gaurav

Your goal to understand depreciation is commendable but unfortunately only partially realistic. 

You can understand the general concept, and some earlier replies on this thread are helpful in that respect. I'll add my non-technical version. If your business paid for something that you will use for several years but is relatively inexpensive, say a $1,000 computer, you can deduct this $1,000 immediately. If your business paid for something to be used for many years and is relatively expensive, say a $100,000 excavator, you spread the $100,000 deduction over 7 years, aka depreciate it over 7 years.

You can then dive into more complex aspects of depreciation:

• why 7 years? because there're different required lengths for depreciation, depending on the item, from 3 years to 40 years
• is it $100,000 divided by 7? no, because there're different methods and tables, also depending on the item
• can you deduct the whole $100,000 immediately? maybe, depending on several factors
• what happens if you sell it after 3 years? have to learn about the concepts of tax basis and depreciation recapture
• etc etc etc

I hope you can feel it's getting complicated fast. Now enter real estate. It's the above complexity times 10. 

• if you treat the entire building as one item, you have to spread everything over a long period of time, and nothing can be deducted right away
• you can separate some components (for example, carpets, appliances, fences, driveways) and either depreciate them faster or even deduct them right away
• when you repair, replace or improve something (like HVAC), you have to understand extremely complex rules known as Tangible Property Regulations, so complex that even us tax professionals specializing in real estate do not always agree on specifics
• some rules are specific to the type of property, for example they only apply to non-residential property or only to brand new property
• and there is a whole lot more than that

So basically, everyone can understand the general concepts, such as the difference between virus and bacteria. But even the specialists do not agree on coronavirus. Depreciation may not be as deadly, but it is no less complicated.