Rental - Repair or Improvement

[peggysioux]

IRS shows replacement of hot water heater as an improvement rather than a repair. Should the life of the repair be depreciated over 27.5 years? The hot water heater only cost $889 and hot water heaters do not generally last 27.5 years. I would think 7 years is more appropriate. How would other tax preparers handle?

Peggy Sioux

[peggysioux]

Rental - Repair or Improvement

With the new repair regulations, would taxpayer be able to apply Reg Section 1.263(a)-3 to expense based on:

1. Annual gross receipt is $10 million or less for thee preceding tax years
2. Unit of tangible property is building with unadjusted basis of $1 million or less
3. Total amount paid during taxable year for repairs & improvements to building does not exceed lesser of 2% of unadjusted basis or $10,000

Peggy Sioux

[ttbtaxes]

Yes, you can make the STSH (2%,$10,000) election and expense it if it meets that criteria. Otherwise, you'd apply the RABI rules. If the building has 4 water heaters then replacing one of them will be an expense. If it is the only water heater, then capitalize and depreciate over 27.5 years.

[peggysioux]

Rental - Repair or Improvement

Yes, you can make the STSH (2%,$10,000) election and expense it if it meets that criteria. Otherwise, you'd apply the RABI rules. If the building has 4 water heaters then replacing one of them will be an expense. If it is the only water heater, then capitalize and depreciate over 27.5 years.

Excuse my ignorance, but in reading the information on STSH election, I do not see where it states that a single water heater would not qualify to be expensed if taxpayer meets the required annual gross receipts requirement, the UOP with unadjusted basis of $1 million or less, and the total amount paid during taxable year for repairs and improvements to building does not exceed lesser of 2% of unadjusted basis or $10,000.

"Small Taxpayer Safe Harbor

The final regulations add a new safe harbor for taxpayers with gross receipts of $10,000,000 or less. The safe harbor is intended to simplify small taxpayers' compliance with the rules pertaining to capitalization of building improvements. Qualifying small taxpayers can elect not to capitalize improvements to a building with an unadjusted cost basis of $1 million or less if the total amount paid during the year for repairs, maintenance and improvements does not exceed the lesser of $10,000 or 2% of the unadjusted cost basis of the building. The safe harbor is elected annually on a building-by-building basis."

Can you point out what I am missing? Would be greatly appreciated; just trying to understand these new regs. so I handle my clients returns correctly.

Peggy Sioux

[BHoffman]

Hi Peggy Sioux - you aren't missing anything. If the property and the taxpayer qualifies, make the election.

I think ttbtaxes might have been pointing out a situation where this would not be an option. Note his use of "Otherwise".

[peggysioux]

Rental - Repair or Improvement

Thanks for the clarification.

Peggy Sioux