All Forum Posts by: Paul Caputo

Bonus depreciation only applies to assets with under 20 years class life, which includes tangible personal property at 5 or 7 years and land improvements at 15 years when we're talking about rentals. The actual structure of the garage and apartment above would still be 27.5 year rental property which doesn't qualify for bonus depreciation. That being said there could be a bunch of tangible personal property inside the apartment depending on what you do and probably not much if any inside the garage. Outside there could be some land improvements but again probably not much with what you've described. If you're using the garage for personal use there would be no depreciation on the garage and you'd only be looking at the apartment. 

The specifics on this are more complex than you'd think, that's why there are engineering firms like mine that do cost segregation to figure out the depreciation. Take the lighting for example: you could literally have two identical lighting fixtures and one would be a 27.5 year asset not eligible for bonus depreciation and the other one is a 5 year asset eligible for bonus depreciation. The difference is the first one is primary lighting and the other is secondary or decorative lighting. Same goes for the baseboards on the wall over the flooring they can go either way depending on how they're installed. Flooring can go either way too: if it's permanently attached like nailed in hardwood or grouted in tile it's 27.5 year, if it's not permanently attached like tacked on carpet or floating laminate it's 5 year. 

With all that being said there probably wouldn't be a lot of benefit in something this size, but if you're curious to see some numbers feel free to PM me.

@Matthew W. Any upgrading or remodeling would need to be capitalized and depreciated unless it's small enough to fall under the de minimis safe harbor rules but you'd need to talk to your CPA about that election.

Generally a large part of remodeling costs would be considered tangible personal property that could be depreciated over 5, 7 or 15 years as opposed to the long life depreciation schedule of 27.5 years for residential rental property or 39 years for commercial property. 

If you have several rental properties (it sounds like you do) it would probably make sense to do cost segregation to take full advantage of accelerated depreciation and bonus depreciation. Of course it all depends on the specifics of the properties. Feel free to PM me and I can give you all the details and work up some numbers for you. You've probably overlooked tens of thousands in tax benefits by not doing this.

$71,000 in improvements for a $400 rent increase doesn't sound like a good deal to me. If you were selling all that might make sense, but even then those improvements are almost 50% of the current value. Will that really increase the value by 50%? I'd do the cosmetic stuff now and reconsider the big improvements when you're closer to selling. 

Just think if you could use that $71k differently and make more money. Sounds like you could pickup another rental with that cash and be looking at another $800-$1000+/mo instead of the extra $400 on that one. 

@Andy Bondhus sounds like you may need to find another new accountant that knows real estate. If he got the furnace wrong on the depreciation there's probably a bunch of other stuff wrong. If the IRS has questions they're gonna come knocking on your door, not your accountant's. What about the old furnace? Did he expense out the remaining depreciation on that retired asset? Probably not, in which case you'd still be depreciating the old furnace which is tax fraud. Don't worry that type of thing is rampant so very low possibility of having any audit issue. I'm guessing it's just a normal furnace for a rental so yes it'd be a 27.5 year asset since it's necessary for the normal operation of the building and provides human comfort. If the furnace had some specialized function, such as in a climate controlled self storage facility, then it could be a 5 year asset. 

I believe you're right about the elections, but I'm not a CPA I just work with depreciation. If you have multiple rental properties it might make sense to get your depreciation done right by a qualified engineer. We've reviewed several thousand depreciation schedules prepared by CPAs and we've yet to see one that is 100% correct. Feel free to PM me and I can take a look. 

@Travis Buck @Michael Plaks You can file Form 3115 at any time. Most people like to file it with their tax return because they'll actually get a refund check if the adjustment is higher than the tax liability. If the adjustment isn't higher than your tax liability it doesn't really matter when it's filed because it'll just be credited against your tax liability. 

Say you have an adjustment worth $50,000 with Form 3115 and you're paying taxes quarterly and your total annual tax bill is $100,000 with $25,000 due per quarter. You file the form and since it's granted automatic consent it's credited to the taxpayer account within 30 days. So from that point you have a $50,000 credit which would pay the next two quarterly payments. Pretty good deal. In this case the benefit isn't about getting a check it's about not sending a check. 

My firm does engineered cost segregation which requires Form 3115 if the subject property was purchased prior to the current year, called a "look-back study". So I can confirm that it can be filed at any time and results in a credit unless it's filed with the tax return which can result in a refund check if the adjustment is higher than the current tax liability. Clients are always happy when they ask their CPA how much they owe and they can say nothing or much less than expected. 

We don't recommend filing an amended return with Form 3115 because it isn't necessary and the increased audit risk. But keep in mind we've never had a client audited for amending with Form 3115 so it's a personal choice and depends on your risk tolerance. We've also only had a handful of clients amend out of thousands so it's not a good sample. Overall audits are around 1-3% so even if you increase that by 50% it's only a 1.5-4.5% chance of audit. I'd just take the credit and not have to pay the next few quarterly payments.

@Travis Buck you have to file form 3115. It is separate from your return and you may file it any day of the year. You're changing from an unallowable depreciation method - not taking any depreciation and changing to an allowable method - taking depreciation whether it be straight line or MACRS. 

Form 3115 allows you to catch up on all the depreciation you've missed and the IRS has 30 days to credit your taxpayer account after they receive it. 

If you file it with your return you can get a refund check from the IRS if the adjustment is big enough to pay your tax liability. Any other day it's credited against your next tax payment(s). 

@Travis Buck You don't actually have to amend your returns. You can file Form 3115 to catch up on missed depreciation. Amending would increase your chance of an audit, but the overall audit rate is very low. Depending on how many rentals you have and the cost basis of the properties it may be a good idea to have a cost segregation study done to get accelerated depreciation and maximize your deduction. If you have questions about it please feel free to PM me. 

You can't really do that. While I suppose you technically could buy a house in an LLC and then rent it to yourself you wouldn't want to do that because you'd get over-taxed which is the opposite of what you're going for here. All the "rent payments" you make to the LLC would be taxed as business income so you'd be getting double taxed. Not a good idea. Plus this looks very strange to the IRS and they don't like things that look strange.

As stated before depreciation is only for income producing property. On a personal residence you don't get depreciation, but you do get the section 121 exemption so you can get $250K ($500K if married filing jointly) exempted from capital gains when you sell the house down the road as long as you lived in the house for 2 of the past 5 years. 

Even if you changed the house to a rental it may not really make sense to do cost segregation. Just looking at one SFR the engineering cost of a cost segregation study would likely eat up a big chunk of the tax benefits from the study. Now if you had 5+ SFR's in the same area that could be done all at once that's a different story.

Also you can't 1031 exchange your personal residence either. 1031's are only for income producing properties just like depreciation. One of the best strategies for tax deferral is combining cost segregation with the 1031 exchange. So you're on the right track, but you've gotta be legit and following the rules which are quite complicated to put it lightly.

@Bobert M. It all depends on what it is. Different assets will have different depreciable lives depending on what they are, where they are and how they're installed plus a bunch of special rules. For rentals the cost of the property and improvements would be split between the 27.5 year rental property (everything structural or necessary for the general operation and maintenance of the building), 15 year land improvements (basically everything outside the building not attached to the building), 5 or 7 year personal property (anything inside that isn't 27.5 year, this is the tricky part as a number of factors determine if an asset qualifies as personal property) and non depreciable land. 

As for your other question your basis for the improvement has to be the actual cost, so no you can't say those $2,000 windows cost $5,000 because that's what the labor cost would've been but you did it yourself for free. If you actually got them done for $5,000 you can add $5,000 to your basis. If you got them for $2,000 and installed them at no cost you can add $2,000 to your basis. In either case with the windows it's a 27.5 year asset since it's part of the structure. 

Some thing you can expense vs capitalize if it's under $2,500 it can fall under de minimus rules. All this means you need to talk to a professional to get advice on your particular situation. Find a good real estate CPA and go through it with them. My firm figures depreciation from an engineering standpoint and it's pretty complex. The thing with replacing assets such as windows is you need to remove the cost of the old windows from the basis before adding the cost of the new windows. You have no way of doing that without talking to an engineer or having the original construction invoices for the old assets. 

All the rules on this are several hundred pages of tax code. You can read it yourself but it's very dense, very boring, often doesn't make sense and the info you want is buried in a bunch of stuff that doesn't apply to you. That's why there are CPAs and specialists like myself (I'm not a CPA) to help people figure all this stuff out. 

Hope this helps, let me know if you have other questions. Feel free to PM me.

I took a quick look at Pub. 527 and looks like you'll be waiting until it's ready to rent, not starting at closing. 

The exact wording is:"You begin to depreciate your rental property when you place it in service for the production of income." and "You place property in service in a rental activity when it is ready and available for a specific use in that activity." 

 Sounds like it wasn't producing income and it wasn't really ready and available that first month either. Would be a different story if you kept it rented to same tenant and then a year later you do the remodel, but in this case I'd say wait until it's ready to start the depreciation clock.