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Fundamental Rules of Depreciation for United States Property

Posted on 30 August, 2015 at 21:40 Comments comments (6)

This is a great post written by Richard Hart EA, CAA, President at Hart & Associates,

I get asked about the rules regarding US Depreciation of Income producing rental property quite often.  Below is a list of some basic rules.

  1. Residential buildings (dwellings, apartment buildings, condominiums, and co-op apartments) must be depreciated over 27.5 years.
  2. You cannot depreciate the land value.  That must be capitalized.
  3. Furnishings may be depreciated over 5 years. 
  4. Paint jobs generally are a current expense, irrespective of how much one costs, unless they are part of a remodeling, or are incurred before the property is put in service. In those instances, painting must be capitalized.
  5. It seems that in IRS audits, they will accept what is done in the industry in general, and allow an expenditure of $500 or less (for an appliance for example) as a current deduction.
  6. Generally, the costs of looking for property to acquire aren’t a current deduction, but must be capitalized into the cost of whatever property ultimately is acquired.
  7. Repair type expenditures made before the building or apartment is put in service have to be capitalized. Consequently, if a taxpayer purchases a building which comes with the need to fix or repair a lot of deferred maintenance before being able to rent it, those expenses still must be capitalized; they are not a current deduction.
  8.  Costs are deductible as a repair if they are incidental in nature, neither adding to the value of the property nor appreciably prolonging its useful life. Likewise, expenditures for material and supplies consumed during the year may be deducted in full for that year.
  9.  Items that must be capitalized:
  • The HVAC (heating, ventilation, and air conditioning) system, including motors compressors, boilers, furnace, chillers, pipes, ducts, and radiators.
  • Plumbing system (including pipes, drains, valves, sinks, bathtubs, toilets, water and sewer collection equipment.
  • Electrical systems (including wiring, outlets, junction boxes, lighting fixtures, and site utility equipment used to distribute electricity from the property line to and between buildings.
  • All elevators
  • Security systems.
  • Renovations