Client has a plumber install a hot water heater for $1200 in a rental unit. There is no breakdown between the cost of the tank and the labor. My understanding is the cost of the tank would qualify for the De Minimis Materials and Supplies Safe Harbor Election up to $2500 but the installation charge would not. assuming I can't get a breakdown which seems always to be the case, I either depreciate over 5 years or try to see if it qualifies for the 2% Safe Harbor. Does anyone see another way to look at this?
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The entire cost was $1200? The labor is required to be included as part of the De Minimis Election. ยง1.263(a)-1(f)(3)(i):
However, the taxpayer electing to apply the de minimis safe harbor under paragraph (f)(1) of this section must include in the cost of such property all additional costs (for example, delivery fees, installation services, or similar costs) if these additional costs are included on the same invoice with the tangible property.
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However, the plumbing system is a separate building system, and the water heater is a major component of that system.
It must be capitalized - 27.5 years for residential rental.
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Originally posted by mactoolsix View Post
If it didn't qualify for one of the expensing elections, I would agree with you (27.5 years), but it should qualify for the De Minimis Election, right?Comment
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Called NATP
The answer I got was since the entire cost was under $2500, $1200 in this case) it qualifies for the De Minimus Election. Had the person bought the Tank at Home Depot and then paid a plumber to install it, the labor would be expensed not depreciated. So this qualifies for the Election.
Part 2- To me a Hot Water Tank is like a dishwasher or stove. So I have depreciated them over 5 years for rentals.
The other argument is their useful life is definitely not 27.5 years, so you can depreciate them over some shorter life that you can look up or prove. .Comment
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While I agree that it qualifies, I don't see how buying it at Home Depot and separately hiring a plumber to install it would make the labor deductible. It would still be part of putting the "asset" into service, and the labor would be depreciated if this whole thing did not qualify for the De Minimis Election. However, this doesn't apply to your situation, so in your case it doesn't matter.Originally posted by Kram BergGold View Post
Part2: Your second argument does not work. Although you are 100% correct that water heater does not last 27.5 years, we are stuck with following the specified Recovery Periods, and we can't just come up with a reasonable useful life to use for depreciation.
While I agree it could be an arguable point, as Mike pointed out, it seems to me to be a "major component" of the "plumbing system". If that is true, that would make it 27.5 years.
Cost Segregation guides point out that a specialized use water heater (such as a Restaurant water heater for only the kitchen) are depreciated for a shorter amount of time. To me, that indirectly shows that a 'regular' whole-building water heater does NOT qualify for that shorter amount of time.
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