Claiming full depreciation of floor/appliances after selling rental property

Forum|Forum|4 years ago
April 17, 2022
2 replies
0 views

I put in a new floor, appliances, etc in 2020. When filing tax 2020, I had choice to depreciate over years or claim the deduction in one shot, but I decided to depreciate over time. Then, situation came that I sold my rental property in 2021. If I want to claim the deduction in full, can I do this in tax 2021? Or my only choice is to go back to do amendment for tax 2020? I think finding a way to claim the deduction in full is the most advantageous to me, if I am not mistaken. Thanks!

ColeenD3

You are referring to the de minimus safe harbor election. No, you are too late.

You cannot file an amended return to make the change in the method of accounting. The only exception is a limited late filing provision found in section 6.03(4) of Revenue Procedure 2015-13 PDF. These provisions grant, for a taxpayer who has timely filed (including any extension) its original federal income tax return for the year of change, an automatic extension of 6 months from the due date (excluding any extension) of the federal income tax return for the year of change to file an amended return in a manner that is consistent with the taxpayer's changed method of accounting and includes the original Form 3115. The return must also have a statement attached to Form 3115 that the application is being filed pursuant to Treas. Reg. § 301.9100-2(b) of the Procedure and Administration Regulations.

Carl11_2

Employee

Many are of the incorrect assumption that depreciation is a permanent deduction. It is not.

When you sell a business and/or it's assets which are being depreciated, you are required to recapture that depreciation and pay taxes on it in the year of the sale.

- Recaptured depreciation is added to, and therefor increases your AGI for the tax year of the sale.

- The increased AGI has the potential to bump you into the next higher tax bracket. (It just depends on the numbers weather that happens or not.)

If you do not depreciate the asset, then you are still required to recapture the depreciation you "should" have taken and pay taxes on it. THis "DOES NOT APPLY" if the asset qualified for the safe harbor de minimis treatment.

The Safe Harbor de Minimis allows you to fully deduct the cost of an asset that costs less than $2,500 in the year you purchase that asset and place it in service. Note that there are other requirements to elect this option. So just because an asset costs less than $2,500 does not mean it qualifies for this treatment.

When you elect the safe harbor action to deduct the cost of an asset, two things matter here.

- The cost of the asset DOES NOT get added to the cost basis of your business or anything else.

- The cost of the asset is a permanent deduction and never has to be recaptured.

- If you sell the asset as it's own item separate from the sale of the business, (I.e.; you sell the asset, but the sale is not a part of the sale of your business.) the cost basis of that asset is $0 and the entire sale price is reportable as income on your tax return. So the sale price would be included in the total gross business income received.

keon821Author

I think there are 2 ways to expense the assets:

de minimis safe harbor

section 179

I was looking at section 179 initially. But folks responded with de minimis safe harbor. section 179 is what TT suggested me. It didn't mention de minimis safe harbor. How can I make use of it in TT?

In comparing the two, it looks like de minimis safe harbor is a better option is you can take it, because it is an expense deduction that will never need to be recaptured. For section 179, you will need to recapture if the asset does not fulfill the full period of depreciation when you sell it. Am I having correct understanding?

Back to my situation, even though it's too late to apply de minimis safe harbor for tax 2020, I can still amend to do section 179, correct? is there any advantage to go back to do section 179? (let's say I have an appliance for $1000, and a hardwood floor for $5000 in 2020.)