Posted by Jimmy on February 17, 2006 at 08:19:28:
I suppose a better bookkeeping software would be completely integrated with the tax preparation software. Not aware of any such products out there.
But once you enter an depreciable asset, you do not have to mess with it again, unless it is sold, destroyed, stolen… so long as you keep using the same tax prep software.
Rental Real Estate Depreciation - Posted by Warren Schumacher
Posted by Warren Schumacher on February 12, 2006 at 16:19:35:
For a residential rental property put in service ten years ago, how do I depreciate, and report the cost on Schedule E, the purchase of a new $3,000 air conditioner that was purchased this past summer?
Capitalize It - Posted by Jimmy
Posted by Jimmy on February 13, 2006 at 15:17:48:
what is expensible currently and what must be capitalized/depreciated can be a fuzzy line. if you are reasonable and consistent, you won’t have much problem in an IRS audit.
for newly purchased “stuff,” the issue is useful life. a new AC unit is easy. its useful life will extend well beyond the year it is installed. it will be depreciable over 5 or 7 years. not sure is an AC unit qualifies as an appliance. if so, it is a 5 year asset. if not, it gets the 7 year treatment.
other situations are not so easy. make a small patch to a roof, and you have an expense. replace the whole roof, and you have a 27.5 year asset (if residential). what about a roof repair job that replaces 25% of the roof surface? probably need to capitalize it. the point: sometimes a “repair” isn’t.
what about carpet and interior paint? I tend to depreciate these as 7 year assets.
what about repairs? generally speaking, you get to expense them. but what if the repair includes some new and expensive components. like an AC coil. I tend to capitalize these. but I could probably get away with expensing it.
when you buy a new property, be sure to think about what you paid, and how the total acquisition cost should be allocated among (a) the land, (b) the physical structure, and (c) the appliances. the land is not depreciable. the house gets 27.5 year treatment. but the water heater, the AC, the furnace, the frig, the stove etc. get a shorter period. it can make a significant difference.
Re: Rental Real Estate Depreciation - Posted by John
Posted by John on February 12, 2006 at 17:23:51:
I am not a CPA but have the same situtation. The home had AC when you bought it, Correct. It went bad and as a result of a repair the unit was replaced, therefore it is expensed as a repair and not depreciated as an improvement. This info was given to me by my CPA, If incorrect, I would like to know because I would have to find a new CPA.
Re: Capitalize It - Posted by Warren Schumacher
Posted by Warren Schumacher on February 13, 2006 at 17:00:42:
Based on Jimmy’s respone, when filling out Schedule E for the next seven years, I have to add 1/7 of the cost of the AC Unit to the annual depreciation cost of the dwelling in order to cover the dwelling and the AC Unit.
Re: Rental Real Estate Depreciation - Posted by Frank Chin
Posted by Frank Chin on February 13, 2006 at 09:29:43:
John:
The CPA and us agreed to EXPENSE items below $600.00, but capitalize and depreciate items above that amount, for replacement. Apparently, there is a dividing line between ordinary expenses and capitalization, and I was told its generally around $500.00, though we made it $600.00 as we were tired of keeping track of “hot water tanks”.
We had some prior discussions on this board about this matter, and the IRS puts out a publication on depreciation, though the $500.00 threshold is not generally acknowledged.
We replaced furnaces and central AC units on properties we acquired years ago, and we depreciate them. It does not matter if it was too expensive to repair, or a bad repair job ruined it.
Frank Chin
Use Turbo Tax - Posted by Jimmy
Posted by Jimmy on February 13, 2006 at 19:45:17:
I assume from your post that you prepare your own return.
if you use Turbo Tax, you enter the depreciation info in year 1. when you prepare year 2, there is a carry over function, which brings forward all the depreciation stuff. no extra work on subsequent years.
and you do not add the cost of the AC to the building. they are 2 separate assets, depreciated on 2 separate time periods.
if this is too much for you to keep straight, think about hiring a tax preparer. They will know how to handle it. as your portfolio of properties grows from 1 to 5 to 40, the accounting responsibilities will blow your mind if you are not super-organized and computerized.
I use Quicken for my accounting. Every dime I spend is categorized as a capital expenditure or an expensible item, and directly linked to the property that generated it (I have 38 different properties). My tax return is an inch think. if I had to hard enter the depreciation each year, I would go insane. But I don’t. I only have to hard enter the new acquisitions and new capital expensitures. All the old stuff carrys over automatically.
Re: Use Turbo Tax - Posted by Bob Smith
Posted by Bob Smith on February 16, 2006 at 17:47:18:
It’s just weird that Intuit requires you keep your depreciation in the tax program rather than in your books. It requires you to enter assets twice (once in QB once in TT) which is time-consuming and error prone.