Remodel Kitchen Rental

[S T]

I am having dilemna on a residential rental unit

Remodeled kitchen - not moving walls, or replacing flooring, replacing the cabinets/countertops, and sink, adding a Range Hood (over stove) - use 5 year - 7 year or 27.5 year depreciation??

Replace A/C with ducting - is 27.5?

Thanks

Sandy

[Uncle Sam]

Residential Property Depreciation

I had a similar situation this tax season.

I prepare the tax return for a 20% owner of residential rentai.
Neither the 20% or 80% owner live in the residence.
The property is located in California - my client lives in NY.
We couldn't get cooperation from the 80% owner as to how she was treating
some kitchen renovations that totaled about $ 6,000.00

So what I wound up doing was depreciating the whole amount applicable
to my client $ 1,200 - as depreciable over 27.5 years. The most conservative
approach - but couldn't get a straight answer from the 80% partner to come
to a joint consensus.

Each partner reports their respective % of the rental activity on their return.
I came into the picture years after this crazy arrangement was made so no
For, 1065 was ever considered by either partner.

[S T]

I would like to say I can offer the client the best Depreciation Treatment on this Kitchen remodel with the Cabinets, etc - as he had purchased a foreclosure and the prior Owner (under foreclosure) was "ticked" and removed all of the cabinetry

So my t/p had no choice but to install new cabinetry and counter tops, etc.

My dilemna then is this Cabinetry-Kitchen install a capital improvement permanently attached to the Dwllg? Seems lke they can be removed if one is really of the mind to.

Sandy

[JohnH]

I think the cabinetry is a part of the dwelling if it's attached to the walls. That would follow the real estate laws. There are many things which technically can be removed but which become a part of the dwelling when attached. In the same way that light fixtures are a part of the dwelling but lamps are not, attached cabinets are a part of the dwelling whereas a free-standing movable cabinet would not.

[Gary2]

My dilemna then is this Cabinetry-Kitchen install a capital improvement permanently attached to the Dwllg?

One can remove the copper piping, and even the wiring, but they're still considered permanently attached. It's been known to happen at abandoned buildings, given the price of copper scrap.

Remodeled kitchen - not moving walls, or replacing flooring, replacing the cabinets/countertops, and sink, adding a Range Hood (over stove) - use 5 year - 7 year or 27.5 year depreciation??

May I respectfully suggest using complete sentences? Until reading the followup, I had trouble figuring out exactly where the "not" stopped applying, because none of the items on the list made sense for anything but 27.5 years.

[Gretel]

For whatever it's worth, I believe that kitchen cabinets and appliances that are not build in like closets should qualify as personal property. A cabinet is not any more attached to a building then a heavy picture or a wardrobe hanging on the wall.

The CPA and I agree on this issue for my big real estate client who now has built several multi-unit properties. Of course, this does not mean it is right. I would love to see a reference for this.

[S T]

Thanks everyone for this information, I do believe, this client would be on the "kitchen" at 27.5 years. Based on some add'l research, IRS has taken a position on this relating to
"cabinets".

Here is another question regarding this particular taxpayer. Lost a tenant approximately Nov 2010, unit was vacant, however, still available for rent, and advertised as such, through signs, realtor, etc. In the meantime, t/p made the kitchen improvements, and then continued other repairs, such as paint, general repairs, -----finally obtained a tenant in July 2011, that moved in with August 2011 Rental payment.

As the property was available for rent during the fix-up period, it can still be a "rental unit" and the box marked on the Schedule E marked at 365 - even though t/p did not receive 365 days of rent?

Reading the Schedule E Instructions, I do not have to complete Line 2 since there are no days of personal use - It was strictly a rental property. Moving forward, the fact that the rental was available for rent and advertised, even though it was 8-10 months of vacancy, I do not have to suspend any of the depreciation and the appropriate methods of deductions (depreciation or repair, utiltity expenses) would be allowed.???

Sandy

[Gretel]

Pub. 527 lists under 5-year depreciation "Furniture used in rental property ", under 27.5 years "Structural components" such as furnace, venting, piping. One would think they would list cabinets if they thing that cabinets are a structural component.

[S T]

While I am searching for my answer, I came across a Recent Tax Court Case - while not necessarily a precedent as the t/p did not furnish the information, does give a guideline for some issues when a t/p is cost segregating

Amerisouth XXXII, LTD, v. Commissioner, T.C. Memo 2012-67

here are some of the articles [http://double-taxation.com/2012/03/1...egation-study/ http://www.journalofaccountancy.com/Web/20125313.htm http://www.accountingtoday.com/news/...t-62274-1.html

I agree Pub 527, Pub 946 does not give a clear and concise approach, however, most of what I have found seems that IRS leans toward and has taken the position "Cabinets" as a structural component, if it is attached to the Bldg.

If replacing one cabinet, maybe a repair, however, an entire room/area such as a kitchen, probably a capital improvement subject to the 27.5 years.

This is great discussion, and I am open for any additional insight and cites. There seems to be proponents of whether the "Cabinets" could be personal property vs Capital Improvements on both sides.

Thereby the post, question and discussion.

Sandy

[taxea]

The easiest way for me to decide how to depreciate/expense is:
1. is it a replacement to maintain the residence is the same condition it was when first depreciated. If the answer is yes then it is an expense.
2. if it is a remodel that is an upgrade and increases the value of the property or is meant to be a reasonably permanent attachment then it is an improvement of the residence and requires 27.5 term.

[Gary2]

If replacing one cabinet, maybe a repair, however, an entire room/area such as a kitchen, probably a capital improvement subject to the 27.5 years.

This is great discussion, and I am open for any additional insight and cites. There seems to be proponents of whether the "Cabinets" could be personal property vs Capital Improvements on both sides.

Be careful not to conflate the different issues.

There's repair versus capital expense. And there's capital expense depreciated over 27.5 years versus capital expense depreciated over a shorter period - which corresponds to real versus personal property. So, for example, an ordinary refrigerator for a rental unit is a capital expense and must be depreciated, but it's also personal property and gets depreciated over five years.

In this case, it sounds like it's a substantial remodeling project, so I still lean towards the 27.5 year treatment. If it were only replacing the cabinets, then you get into the grey area that people have idendified about whether or not it's structural.

[Kram BergGold]

componant depreciation

If your clinet knows the cost of each componant then depreciate each according to waht it is. So I would depreciate the cost of actual items purchased over 5 years. The labor to install over 27.5 years.

[taxea]

If your clinet knows the cost of each componant then depreciate each according to waht it is. So I would depreciate the cost of actual items purchased over 5 years. The labor to install over 27.5 years.

I don't know that I could agree with your concept. If the cabinets are upgraded and they are attached to the structure that would be an improvement. Portable/movable things okay as 5yr. but not structural items to my mind.

[Lion]

Sandy seems to think her client expected the cabinets/kitchen to stay as it was during the rental period, but that a "ticked" renter took or destroyed some items when he left. Because of Sandy's description, I would use 27.5. Yes, you can buy free-standing Ikea kitchen units, but that doesn't sound like what was there before. And, he's definitely improving the kitchen over the way it was left after the "ticked" renter left. I'm all for getting my clients the best tax result legally available, but Sandy's description makes it sound like this was a kitchen remodel, structural, and 27.5 year depreciation.

[joanmcq]

I disagree. I read Sandy's further description as the previous OWNER took/destroyed the cabinets. So in order to get it up to rental standards, had to add cabinetry. So, 27.5 depreciation.

Another scenario she described was a vacant rental held by the same client who decided to do some improvements while the unit was vacant, but advertised for a tenant all during the vacancy. Again, I would use 27.5, but the question was how to fill out the 'days rented' etc questions at the top of the Sch E.

I haven't used those boxes at all on my rentals or rental owning clients. In the past, that info was only used if it was a property under the vacation rental rules, and still view it as such. If I'm wrong, let me know. But I haven't had any efile rejects, or even error messages for not putting '365 days rented' for my or my client's 100% rentals.