I found a new accountant to help with this year's taxes and unfortunately he doesn't appear to know a whole lot about rental property taxes. I picked up our completed taxes yesterday and fortunately I know enough about our taxes that I was able to look them over and immediately could tell that several items were wrong. I called the office and was able to come back in to have the items corrected. Since last night, my wife and I have been going over things again and still have some questions I was hoping BP could help with before I confront the accountant again.
One of his first mistakes was he had a new furnace down as furniture and depreciating it for 5 years, 200% declining balance. He corrected it to furnace and when I asked him about the 5 years depreciation, he said it would still be the same. I'm thinking this is considered a building improvement and needs to be depreciated 27.5 years SL? The cost of the furnace is over the $2500 De Minimus safe harbor amount I could claim, so I believe it will need to be depreciated.
Speaking of De Minimus safe harbor, don't we have to make an election as to which safe harbor we're claiming for the year? (Safe harbor for small taxpayers, De minimus safe harbor or Routine maintenance safe harbor). I don't see anywhere included with my taxes where an election was made, not to mention he never asked which one(s) we may be using this year.
Then there's the subject of being a "real estate professional." I know what the qualifications are to be a real estate professional, but I've read that an election may need to made so that I can treat all my rental activities as one activity so that my hours claimed are considered for all my properties versus needing to prove I spent enough hours for each individual property.
I think this particular accountant knows taxes, just not specific things regarding rentals. If anyone can shed some light on these items, it would be greatly appreciated.
@Andy Bondhus sounds like you may need to find another new accountant that knows real estate. If he got the furnace wrong on the depreciation there's probably a bunch of other stuff wrong. If the IRS has questions they're gonna come knocking on your door, not your accountant's. What about the old furnace? Did he expense out the remaining depreciation on that retired asset? Probably not, in which case you'd still be depreciating the old furnace which is tax fraud. Don't worry that type of thing is rampant so very low possibility of having any audit issue. I'm guessing it's just a normal furnace for a rental so yes it'd be a 27.5 year asset since it's necessary for the normal operation of the building and provides human comfort. If the furnace had some specialized function, such as in a climate controlled self storage facility, then it could be a 5 year asset.
I believe you're right about the elections, but I'm not a CPA I just work with depreciation. If you have multiple rental properties it might make sense to get your depreciation done right by a qualified engineer. We've reviewed several thousand depreciation schedules prepared by CPAs and we've yet to see one that is 100% correct. Feel free to PM me and I can take a look.
@Andy Bondhus I’m not entirely sure about your question but my cpa is in Houston (localish to you), if you want to give them a try. Feel free to PM me
Don't waste any more time or money on this accountant. Interview others specifically to determine their real estate tax expertise.
Depreciation of the furnace depends if its attached structurally to the building(most are). It is depreciated over 27.5 years if it is.
There are certain elections that you want to make the first year that your property is placed into service. There are also certain elections that you want to elect regarding the De Minimus Safe Harbor. If the tax accountant is using a software - it should be easy as clicking 1 button.
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