Is a replaced heat pump an improvement or repair to rental property? The original broke and had to be replaced for heat and air conditioning.

Forum|Forum|6 years ago
June 1, 2019
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Best answer by brucecollet

Here's a good discussion on the difference. https://www.landlordology.com/repairs-vs-improvements-tax-deductions/

brucecolletAnswer

Employee

Here's a good discussion on the difference. https://www.landlordology.com/repairs-vs-improvements-tax-deductions/

JoeN1

The link to the Tangible Property Regulations - Frequently Asked Questions article is a great explanation of the differences between a repair vs. an improvement vs. a restoration. However, the article omits a discussion of Safe Harbor. See Safe Harbor Election for Small Taxpayers in Tangible Property Regulations - Frequently Asked Questions.

Under Safe harbor, even though replacing a heat pump would normally be considered a restoration of a major component and thus must be capitalized, a typical small taxpayer may elect to not capitalize it and take the full deduction in the current year. That said, you could still capitalize it if you want.

From the IRS Tangible Property Regulations - Frequently Asked Questions:

Safe Harbor Election for Small Taxpayers

You are not required to capitalize as an improvement, and therefore may be permitted to deduct, the costs of work performed on owned or leased buildings, e.g., repairs, maintenance, improvements or similar costs, that fall into the safe harbor election for small taxpayers. The requirements of the safe harbor election for small taxpayers are:

Average annual gross receipts of $10 million or less; and
Owns or leases building property with an unadjusted basis of less than $1 million or less; and
The total amount paid during the taxable year for repairs, maintenance, improvements, or similar activities performed on such building property doesn't exceed the lesser of-
- Two percent of the unadjusted basis of the eligible building property; or
- $10,000 (for questions about how to calculate the unadjusted basis, refer to "Figuring the Unadjusted Basis of Your Property" in Publication 946
You make the election to use the safe harbor for each taxable year in which qualifying amounts are incurred.
- The election is made by attaching a statement to your income tax return for the taxable year. See When and how do you make an election provided under the final tangibles regulations?
- An annual election is not a change in method of accounting. Therefore, you shouldn't file Form 3115, Application for Change in Method of Accounting, to make this election or to stop applying the safe harbor in a subsequent year.

Employee

An improvement depreciated same as original property.

Heating, ventilation and air conditioning (“HVAC”) systems (including motors, compressors, boilers, furnace, chillers, pipes, ducts, radiators);

Improvements to a building system are deemed an improvement to the building as a whole. The taxpayer will then capitalize the improvement cost into the UOP of the building. [27.5 years depreciation]

jrvanic

Is replacing a heat pump with a energy star (New Heat Pump & Condensor)

AHRI type: HRCU-A-CB

Series: GSZC16

Outdoor Unit Brand Name :GOODMAN SEER : 16.0 Model No. GSCZ160361C

Indoor Unit Brand Name: GOODMAN (Evaporator and or Air Handler)

Will this qualify for energy credit

Thanks,

JRV

Critter

Employee

energy credits for AC units was not renewed for 2018 and forward ... all there are is solar credits

Carl11_2

Employee

The key here is two-fold. First is the cost. Was it less than $2,500? (that includes the cost of labor.) If so, then it was to replace an existing asset, as opposed to installing a new asset? So if you replaced the heat pump, and not the entire system (which would include the whole outside unit and the whole inside unit) then it's a repair expense if it was under $2,500. I'm sure it was well under that price too.

Whereas replacing the entire system would easily exceed $5K and that would be a property improvement hands down.

What you have (if I'm interpreting your post correctly) is a repair expense because you replaced the heat pump only to keep the entire system working.

Now if you're calling the entire outside unit the heat pump, I know you paid more than $2,500 for it, including labor. So that would be a property improvement.