Septic Install - Deductions/depreciation

6 Replies

Good Morning everyone,

So, here's the scoop, I'll be closing on a triplex (first deal, house hack, Hunterdon Co. NJ) within the next month. We are replacing the old (really old) septic system via a FHA 203K loan after we close. The cost of the system will end up being about $42K-45K, built into the mortgage.

Still trying to understand some of the finer points of House Hacking deductions and depreciation. CPA's, Tax advisors, Landlords and House Hackers are more than welcome to chime in.

Here are the questions: 

  • Since there was an existing system (that will be pumped, crushed, and abandoned), would there be a difference (deduction/depreciation-wise) if this is considered and alteration vs an install? I've seen contractors propose these both ways for the same work.
    • If it's an alteration, would it be considered a repair??
  • I assume i cannot do a straight line deduction the entire system, but can i deduct part of the installation? 
  • I've read the system may be considered an improvement on the land, thus maybe deductible over 27.5 years.
  • Can any of these strategies be integrated?

Thanks in advance for any and all advice!

@Joe DeLuca

I had a similar situation last year and can offer few thoughts...

  • For the new system: From my experience, a new septic system is a capital investment and that will need to be depreciated.  Be sure your accountant is aware of that when you do your taxes.  
  • For the existing system:  If there is any residual value of the existing system (which it doesn't sound like there is), I believe you can deduct that residual value the year when the system was removed.  Be sure your accountant is aware of this, too.  They will need to look at the entire value of the buildings and infrastructure, attribute part of the value to the existing septic system and deduct that portion as an expense, minus what might have already been depreciated.   
  • For the work required to destroy the existing system: You're right, this is considered a land improvement and will have to be depreciated.  I know.  It sucks.  

Who told you that you had to replace the old septic system and why?  I have a lot of experience with such systems.  A lot of septic/drain field companies are, like your septic tank, full of s . . .!

@David Cruice , in the process of buying the property, the OPRA docs indicated that the septic system hadn't been replaced in the prior 60ish years and was rated for 3 bedrooms (not 6 that come with the property). Not wanting to bear the burden myself, we had a conversation with the seller (who did not want to replace the system), and ended up getting it inspected by a 3rd party inspector to which it failed. 

During the financing portion, once the lender found the septic failed, he indicated it needed to be replaced or FHA wouldn't finance.

Unfortunate!  If you're going to proceed to closing make sure your future tenants FULLY understand that the only things that should be flushed down the toilet are #1, #2, and toilet paper.  NOTHING else, including baby wipes, medications, kitchen towel, tampons, and, especially, cleaners such as draino, Clorox, etc. should be put in the toilet.  And make sure they understand to NEVER pour cooking oil/grease down the kitchen sink or the toilet.  All of the aforementioned will kill off your drain field quicker than you can say, "Oh sh*t!".  Look up some videos on maintaining a drain field, take care of it, and you'll be good to go for years to come.  Finally, make sure the company that installs the new system puts a filter in the baffle on the exit end of the septic tank.  The only thing that should go into the drain field is waste water.  No solids should enter the drain field - especially grease, which floats!