Depreciation for HVAC in 2020

Forum|Forum|5 years ago
January 25, 2021
2 replies
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I purchased two HVAC systems this year for two different rental properties. One unit was $3,300 the other $2,495. Both HVAC units are more than 2% of the unadjusted basis for their respective properties.

I would normally depreciate the HVAC unit for 27.5 yrs. However, can I use either section 179 depreciation or the 100% bonus depreciation for either of the units?

Best answer by ColeenD3

Yes, the labor can be an expense and yes, as long as each item is $25,00 or less, you can use Safe Harbor.

De Minimis Safe Harbor Election

This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

You don't have an applicable financial statement (most people don't).
You have a consistent process for how you record expenses and assets.
You record these items as expenses on your books/records.
The cost of each item as shown on your receipt is $2,500 or less.

RayW7

As for depreciation, if they are part of the central HVAC system you have to depreciate them over 27.5 years. If they are stand alone units, more like window AC units (i.e. not a part of the structure of the building) then you can depreciate them over a seven year period.

However Landlords may use the De Minimis Safe Harbor to deduct any cost as substantiated by a invoice as long as that cost does not exceed $2,500 ($5,000 if you have applicable financial statements).

This dollar limit is applied to each item on the invoice, not the invoice in the aggregate. As a result, it is critically important to itemize all invoices.

The limit was originally $500 when released in 2013 but the IRS later retroactively applies an increased $2,500 limit.

There is an anti-abuse rule which prevents landlords from breaking down the cost of a component into each of its individual parts on an invoice. For example, you cannot deduct the cost of a new HVAC if the total cost was $4,000 by breaking up that cost into the HVAC’s individual parts on the invoice.

WhatsNexAuthor

So, to clarify, all 27.5 year property such as HVAC and Water Heaters are eligible to use De Minimis Safe Harbor if the the line item on the invoice identifies them as less than $2,500?

Can you separate the labor to install the new and remove the old item?

ColeenD3Answer

Yes, the labor can be an expense and yes, as long as each item is $25,00 or less, you can use Safe Harbor.

De Minimis Safe Harbor Election

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

You don't have an applicable financial statement (most people don't).
You have a consistent process for how you record expenses and assets.
You record these items as expenses on your books/records.
The cost of each item as shown on your receipt is $2,500 or less.

leeniemela

I replaced an HVAC for almost $20,000. Can I claim the 100% Special Allowance under sec 179 for this?

Carl11_2

Employee

If the HVAC was for residential rental real estate, then no. The new system became "a material part of" the structure. Therefore it's classified as residential rental real estate and depreciated over 27.5 years.