Q:

Subject: Schedule E Improvements vs Repair Expenses

 

Mr. Kerstetter,

 

How are you today?  I need your "guru" thoughts on improvements versus expenses on a residential real estate rental.  I saw your website and though I would see if you could give me your thoughts on this.

 

If you buy a new oven/dishwasher for a condo rental because the ones currently in the rental are not functional is this a repair or do these items have to be depreciated as seperate assets?  It is really black and white when you buy a furnishing like beds and couches for the rental- because those aren't repairs they are adding value.  But on the replacement of a fridge/oven/microwave/dishwasher/washer/dryer that already existed in the apartment it seems as though this could be considered a repair expense.  Your expert thoughts would be greatly appreciated?

  

Best Regards,

A:

You really need to be working on matters such as this with a tax pro so that you don't screw things up on your own.

New appliances do need to be set up on the depreciation schedule and deducted over their useful lives.  Trying to deduct them as repair expenses is one of the fastest ways to have your tax return flagged for an audit.

This actually balances out if you set the rental property up properly on the depreciation schedule when you first placed it into service.  While not all people do this, you are allowed to separate out the values of the appliances and other assets that are separately identifiable from the overall purchase price and put them on their own lines of the deprecation schedule, with their own lives, which are usually much shorter than the 27.5 years that you have to use for the structure.

This technique isn't very complicated and has been around for decades.  Any tax pro who is experienced with properly handling rental properties can assist you with this, including how to adjust for a failure to do a proper allocation several years after the original purchase, such as is probably the case for you.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/12/2006 01:09:00 PM Send this post: