Yeah, a big resitriction is that Section 179 expensing is only allowed for an active income business or trade. Rental property operation is defined by the tax codes as a passive income activity. Therefore, no section 179 expensing.
Of course, real estate professionals can convert their passive rental activity to an active income activity to take advantage of the unlimited “passive” loss allowance against ordinary income. But, then they are no longer engaged in a passive income activity, either.
$10K “capital expenses” yearly writeoff? - Posted by Dave Hanson
Posted by Dave Hanson on August 17, 2004 at 12:30:52:
On page 189 of his excellent 2002 book Value Investing in Real Estate, Gary Eldridge writes,
Generally, income tax law requires property owners to amortize long-life items such as new roofs, kitchen remodeling, or a garage reconversion. However, to simplify bookkeeping, the IRS permits small real estate investors to write off these types of capital expenses each year up to the amount of $10,000. In other words, this IRS rule gives property owners a large deduction that immediately reduces (or eliminates) their liability to pay income taxes.
While this author is generally very well spoken, this claim is news to me, and I’m skeptical of its accuracy. The pertinent IRS document is http://www.irs.gov/publications/p527/index.html, and I didn’t find anything mentioning this $10,000 exception.
He may be referring to IRC Section 179. It used to allow $10,000 of write off in the first year property is placed in service. Now it allows up to $100,000 of write off in the first year, but many exceptions and limitations apply. Generally, it must be tangible personal property. See Pub 946 at http://www.irs.gov/pub/irs-pdf/p946.pdf. There is also a Special Depreciation section in this Pub which may be of interest to you.
Here is a quote from IRS Publication 527 for 2003 (page 7, Depreciation): “You cannot simply deduct your mortgage principal payments, or the cost of furniture, fixtures and equipment, as an expense.”
This says that your personal tangible property (such as washer and dryer, appliances, carpet, or other furniture) that you might find in a furnished or partially furnished property is depreciated and not expensed. The depreciation schedule is 5 years.
Additions or improvements to the structure as well as any other pieces of equipment that are or become permanent fixtures that you install or replace (such as central heat and cooling system, roof, or water heater) are depreciated on the same schedule as the permanent structure (27.5 years). (See the depreciation schedule on page 10, Pub 527).
What else is left? Anything that does not have a useful life greater than one year can be expensed. The furnace filters you provide or light bulbs you replace are supplies that can be expensed. You have the choice of either expensing or capitalizing certain carrying costs (costs of ownership) such as mortgage interest and property taxes, but it is usually in your best interest to expense these items.
Just curious how old this book is that you refer to. I believe the ability to expense up to $10K in tangible personal property that you provide for your tenant’s use in your rental property was eliminated in the tax code changes in 1986.