Rental Property Investor · Falls Church, VA · Member since 2021 · 23 posts · 2 votes
Newbie here.
My HVAC needs to be replaced in my primary residence condominium. It’s still working but it needs to be replaced in the near future because it’s old.
I plan on moving out in six months and renting it out. Will be my first rental.
From a tax (and any other factors) perspective should I go ahead and replace it now or wait until I convert the property to a rental? From what I understand this would be a capital improvement which can be depreciated over 27.5 years but not sure how helpful that is and if it will help my spouse and I (both W2) on our personal taxes.
So we agree then. Note what I said - “once it’s a rental”. Not “once a tenant is in there and it breaks down unexpectedly and you have an emergency on your hands”. Unless you’ve got it set up where someone is moving in the the next day after you move out, there will be a period where it is vacant and being advertised for rent. Making it a “rental” at that time.
The primary benefit of waiting isn't accelerated depreciation... An HVAC is part of the HVAC subsystem of the building unit of property. Furthermore, it makes the building habitable and ready for its intended use. It is properly categorized as a 27.5 or 39 year GDS asset for tax purposes. The exception might be an A/C that is dedicated to conditioning only a certain room, like a window unit. We'd generally have a bonus-eligible 5 year GDS asset there if the property is used in a rental activity.
So, it comes down to whether there's an option to expense or we must capitalize. If OP elects de minimis safe harbor ("DMSH"), he's going to have to capitalize as the expenditure is going to be more than $2,500.
If OP forgoes the DMSH and instead applies the Betterment, Adaptation, and Restoration tests ("BAR tests") under the tangible property regs, we'd almost certainly have a betterment and/or restoration of the HVAC subsystem on our hands, so we'd also capitalize under this option.
OP may be able to use the safe harbor for small taxpayers ("SHST") to expense the costs, however not enough information was given by OP.
If SHST is off the table due to limitation, then must capitalize. Worst case -- we'd capitalize and carve out original basis allocable to the old unit (probably not much) and do a partial asset disposition.
The above is general advice, and you should discuss with your tax professional, the one who knows your facts, circumstances, and goals, if you have further questions. If your current tax professional is unable to advise on the matter, a change may be in order.
@Nabeel Qureshi I would say wait to replace it until it needs to be replaced so you can get some more life out of it. As long as it’s not a safety hazard or sounds like it is going to blow up it shouldn’t be a problem. Tenants typically aren’t too picky unless the units don’t work.