rental property expense question

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Loon11
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rental property expense question

Post by Loon11 » Mon Mar 20, 2017 11:42 am

I havent been able to find a clear answer so I'm turning to the experts on Bogleheads! I have a rental duplex that has had much trouble over past 2 years with heating. I switched to heat pump 3 yrs ago and the place freezes in winter. I had an energy audit last year which revealed the place leaks like a sieve. the recommendations involved about $10K of work which we did.
for 2016 we spent $4250 on encapsulation expenses of which $550 was repair (remove old junk in crawl space and repair the door to it)
the rest is cost of insulation and labor $1800 for vapor barrier labor and sealing and $1900 for the foam/conditioning.
Honestly I feel like it should be repair since the place would not heat. there are more expenses but this is the part done in 2016.
should I depreciate the part that is insulation (I think it was $1900) and deduct the labor of $1800?
Any advice is appreciated!
We spent another 4K+ in the attic and upstairs unit but that's for 2017. Thanks so much!!

clydewolf
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Re: rental property expense question

Post by clydewolf » Mon Mar 20, 2017 12:06 pm

I believe you know the answer.

When you had the heat pump installed, Did you break out the labor as an expense? Then put the materials on a depreciation schedule?

If this were your primary residence would you expense the labor and only add the materials to your basis?

You depreciate the entire $3700.

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Meg77
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Re: rental property expense question

Post by Meg77 » Mon Mar 20, 2017 12:30 pm

I'm no tax expert, so a CPA would be the best person to answer your question. But I own a bunch of rentals and generally expense everything that isn't a specific capital improvement or replacement (new roof, upgraded counters/fixtures, etc.). Adding insulation, re-sealing some areas, and various other related expenses such as clearing a crawl space would be a project I would probably just expense. But that may not be the right thing per the exact letter of some tax guideline I've never read...
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JGoneRiding
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Re: rental property expense question

Post by JGoneRiding » Mon Mar 20, 2017 3:46 pm

I am with meg. I have never depreciated anything under 2500. Maybe not technically correct but i believe in the spirit of the law and also the question turbo tax asks when doing my schedule Es. Everything else i chalk up to either maintenance or repair. In your case i would probably call everything but thr heat pump itslef maintaince.

Just an opinion not a lawyer etc

Tal-
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Re: rental property expense question

Post by Tal- » Mon Mar 20, 2017 4:41 pm

I have my taxes done, in large part so I don't need to know this level of detail.

With that said, to me, that sounds an awful lot like an improvement, and thus, capital. And, I would have figured that you can't segment out labor from parts. Meg knows this type of thing better than me - but that's my two cents.
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Loon11
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Re: rental property expense question

Post by Loon11 » Mon Mar 20, 2017 5:47 pm

Thanks all -I would think it would be a capital improvement if this was done to improve the value; HOwever, the only reason we did this encapsulation and conditioning - fixing up a leaky crawl space was for the purpose of making the apartments hold heat. For 2 past winters, we had the HVAC folks come out to see what was wrong with the heat pumps but they only said it is the building. So we had little choice but to insulate and try to tightent he building.
the apartments in the duplex could not get above 55 degrees even though set on 70. we were providing space heaters and had to do something.
So I am not sure how the IRS would see this but it almost seems like repair/maintenance. Again, I want to do the right thing but $3700 over 27.5 is about $134 off expenses. In one place Turbo says fixing leaky walls with insulation is repair but not an answer on encapsulation/insulation.

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knpstr
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Re: rental property expense question

Post by knpstr » Mon Mar 20, 2017 6:10 pm

I would think that this would surely be a capital expense.

A "restoration" or betterment is an improvement and a capital expense to be depreciated. You were restoring the house to hold heat.

For example, IRS Pub. 527 specifically denotes insulation work as an "improvement" and not a repair expense.
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Loon11
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Re: rental property expense question

Post by Loon11 » Mon Mar 20, 2017 9:42 pm

Thanks again and I can see it as a capitol expense. In Turbotax, they give an option of expensing it under the safe harbor rule but this is something I"ve not done and wonder how it impacts the future. Sounds like a fine option but what about the existing depreciation I'm taking? is it just going forward?
this sounds almost too good and I'm afraid I'm missing something. I keep all my expenses consistently - is there any down side to this safe harbor option?
Thanks!

clydewolf
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Re: rental property expense question

Post by clydewolf » Tue Mar 21, 2017 8:36 am

When the improvements you make have a useful life of more than one year it is a capital improvement and should be depreciated.

Prior to January 1,2016, for someone with no Applicable Financial Statement (AFS), the safe harbor limit was $500 per invoice to expense tangible property. If you have an AFS in place the safe harbor limit was $5,000 to expense the tangible property.

Effective January 1, 2016 the safe harbor limit to expense tangible property for a taxpayer without an AFS is increased to $2,500.
Here is more: https://www.irs.gov/pub/irs-drop/n-15-82.pdf

On my rental property when an improvement has a useful life of more than one year, I depreciate the improvement regardless of cost.

Whatever you decide to do, you want to be consistent.

Loon11
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Re: rental property expense question

Post by Loon11 » Tue Mar 21, 2017 10:33 am

Thanks clydewolf - I read up on it last night and believe you are right on. Not really what I wanted but think this is the letter of the law.
Just doesn't go down easily that all that expense won't help with my taxes. Thanks again

NWbrewer
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Re: rental property expense question

Post by NWbrewer » Wed Mar 22, 2017 3:12 am

There are three different safe harbor elections that can be used for rental expenses. Clydewolf is referring to the de minimis safe harbor witch doesn't apply to Loon11's situation. You want to look at the election to utilize the "safe harbor for small taxpayers" witch tops out at the lesser of $10,000 or 2% of your property un-adjusted basis and includes all repairs, maint, and improvements costs combined for the tax year.

https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#ElectiontoCapitalize

https://www.irs.gov/irb/2013-43_IRB/ar05.html

https://www.biggerpockets.com/blogs/6032/41669-understanding-the-safe-harbor-rules-and-keeping-money-in-your-pocket

A couple of general comments. You can't separate out labor from your other cost for a capital expense. You can't separate out repairs that are done as part of an improvement and vise versa. Encapsulation of a crawl space that was not already encapsulated is clearly an improvement/betterment. The newer hvac did not make the building leaky, it was always leaky. The change in systems just highlighted a preexisting condition that is common in almost all older houses and even some new.

Loon11
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Re: rental property expense question

Post by Loon11 » Sat Mar 25, 2017 9:13 pm

Thanks NWbrewer! Having rental property is a blessing and a curse! I keep all expenses and log everything and don't think too much about it until tax time and then try to learn everything new. I have been using Turbo Tax forever and usually get through OK but it isn't full of information.
Thank you for these links - they really explained a lot.

ralph124cf
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Re: rental property expense question

Post by ralph124cf » Sun Mar 26, 2017 1:13 am

What I read into the above answers is that the IRS may charge you interest if they audit you, but that they are unlikely to charge you a penalty for expensing the improvement.

Ralph

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