New Refrigerator - Capital Expenditure or Repair?

Question

New investor here!

We had to replace our refrigerator in our rental, due to the old one breaking. Is this a Capital expenditure or an operating expense?

I'm also wondering what the advantages are of classifying one as an operating expense vs. a capital expenditure. Isn't an operating expense better since it's deducted immediately rather than over 27.5 years as a depreciation expense?

Frank Chin · Answer

@Marty Rogachefsky

No, you don't depreciate a new refrigerator over 27.5 years. Normally, you would only depreciate based on the life of the equipment, which could be as little ten years nowadays as a recent article mentioned new refrigerators now last 10 years or less.

However, for taxes, you can do a section 179 election for equipment purchased for less than $1,160. Then there os a "De Minimus" deduction amount that you can do for $2,500. So it depends on the amount of the equipment.

I have a CPA handling my taxes, and years ago, he set a $1,000 limit originally for deducting equipment which had been increasing over the years, so I no longer ask him annually. I don't know the cost of your fridge, but my CPA would simply expense it.

The funny story is a rehabbed a house, bought appliances in a refrigerator, hot water tank and depreciated the entire rehab over 27.5 years.  Then, several years later, the hot water tank broke, so we depreciated the second one. Then the second one broke over a few years, and we depreciated a third. One year, I was looking at the depreciation summary my CPA printed out and I remarked, wow, are we depreciating 3 water tanks. The one combined with the total rehab we couldn't touch, but we zeroed out the depreciation for the 2nd and 3rd tanks when we booked the 4th one.

Account Closed · Answer

Hey Marty! Repairs like this are usually capital expenditures, you write if off in the year purchased and don't depreciate it over time. Repairs and maintenance for rentals are not depreciable as it is not effecting your basis. Im generalising here

Nathaniel Quesenberry · Answer

Marty,

So replacing the refrigerator is going to be considered a capital expenditure and would need to be put on a depreciation schedule and depreciated. You would use a different class life for the refrigerator as it is not going to last 27.5 years, and usually that's 5 years.

With that said, there is a de minimis election that allows you to expense any capital expenditures under $2,500 ($5,000 if your business has audited financials).

Alternatively you could use Section 179 expensing here as well, but the expensing can't create a loss for the rental and may be carried forward. You could also claim bonus depreciation as well which allows 60% of the basis as a deduction in 2024.

I generally tell clients to expense anything under $2,500 unless there are other factors at play that may change that decision.

Ashish Acharya · Answer

You can write off the fridge under De minimus safe harbor if that is under 2,500. If not, you can capitalize this and take a bonus or section 179 deductions.

Writing off might not be a good idea. Capitalizing and depreciating will not affect your DTI.

Jason Malabute · Answer

When you replace a refrigerator in your rental property, it typically counts as a capital expenditure (CapEx) rather than an operating expense. A capital expenditure is any cost that improves the property, extends its life, or adapts it for a new use. Since the new refrigerator replaces an old one that has reached the end of its useful life, it adds value to the property and thus is categorized as CapEx. This means the cost would generally be capitalized and depreciated over time, rather than deducted immediately as an expense.

On the other hand, if you were simply repairing the existing refrigerator to maintain its normal operation, that would likely be considered an operating expense. Operating expenses are routine and necessary costs to keep the property in its ordinary operating condition, and they are typically deductible in the year they are incurred.

You also mentioned the benefits of classifying something as an operating expense versus a capital expenditure. It’s true that operating expenses can be deducted immediately, while capital expenditures are typically spread out over a longer period. However, there is an option that might be advantageous for you: the Section 179 deduction.

The Section 179 deduction allows you to deduct the full purchase price of qualifying equipment or property in the year it’s placed in service, rather than depreciating it over several years. For tax years beginning in 2024, the maximum Section 179 expense deduction is $1,220,000. Appliances like refrigerators typically qualify for this deduction, so you might be able to fully deduct the cost of the new refrigerator in the year of purchase, provided it falls within this limit.

JD Martin · Answer

If you file your taxes right you can expense a lot of things that you would otherwise have to capitalize. De minimus would let you expense that fridge assuming it was less than $2500 which is what you almost always want to do. Anything you capitalize you are going to recapture when you sell as it's going to follow a depreciation schedule. Expenses>capitalization in terms of deductions and taxes.

Allan C. · Answer

@Marty Rogachefsky I suggest trying to expense as much as you can instead of capitalizing. Why wait 5 or 10 years to get the tax shielding benefit? Ask your accountant about de minimis safe harbor or safe harbor for small taxpayers.

It’s extremely powerful to compound your earnings, which means you want to legally minimize or defer your tax payments as much as possible.

Marty Rogachefsky · Answer

Thanks! This is super helpful. Is there somewhere I can look to reference the different depreciation schedules? I'd also be curious about a few things:

1. Repainting the interior of the house

2. Refinishing the hardwood floors

3. Replacing the screen door and screen windows.

Kevin Sobilo · Answer

@Marty Rogachefsky, if you repaired the old refrigerator that would be a maintenance/repair aka an operating expense but by replacing something that had reached its useful life its a capital expense and is depreciated.

A couple things to keep in mind:

1. The 27.5 year depreciation schedule is for a residential property improvement as a whole. There are different schedules for different categories of things. A commercial property is depreciated over 40 years. An appliance like a refrigerator is depreciated over just 5 years.

2. Yes, you get your benefit faster by improperly claiming this an expense, BUT besides it being technically incorrect it can affect your ability to get certain kinds of financing.

For example a DSCR (debt service coverage ratio) type loan looks at how a rental performs to determine how it qualifies for a mortgage. If you claim these capital expenses as maintenance/repair it looks as if you are making LESS on the property. So, if you were to try to refi this property you might not qualify for the loan you want.

New Refrigerator - Capital Expenditure or Repair?

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