depreciation

[taxmom]

Client putting in new septic system on a rental property. How long does this get depreciated out?

[Black Bart]

Hi taxmom and

welcome to the board. There's alway room for good moms to help referee us.

I think it's 27 1/2 years. I know you'd like something faster, so don't take that as the gospel -- there are many more knowledgeable folks than me around here and if you stick around for awhile, I'm sure they'll chime in and say 5 to 15 years or maybe even a radical who'll want to expense it on the spot.

[Snaggletoof]

15 years

Mom, I think this is 15-year land improvements. Bart could just as easily be right, but so could other people who might give you another answer.

I'll be honest, I don't drive myself nuts trying to figure how an IRS auditor would classify items other than equipment. If we get dinged, we're only talking peanuts. Also on this subject matter if you could gather 10 IRS auditors, you would get 6-7 different answers.

[sea-tax]

Mom, I think this is 15-year land improvements. Bart could just as easily be right, but so could other people who might give you another answer.

I'll be honest, I don't drive myself nuts trying to figure how an IRS auditor would classify items other than equipment. If we get dinged, we're only talking peanuts. Also on this subject matter if you could gather 10 IRS auditors, you would get 6-7 different answers.

I would agree with Snaggletoof and BB that you may get different answers to your question. I would not classify this as 15year land improvements because it is not an improvement of land but rather an integral part of the home.

I would lean on the conseravtive side and classify it as 27.5 year property, because it is an important feature of a home. Meaning you need a waste system in order for a home to pass most local building codes. I would also like to point out that typically a septic system is a permanent item and will not be moved from the specific property. That would also lead me to believe that it is 27.5 year property.

[jimmcg]

Land Improvements

Septic sytems generally fall under Asset Class 00.3 Land Improvements.

[Jiggers]

Septic System

The IRS Pub 946 shows "sewers" as Land Improvement, 15 years. I use 15 years on my clients with rental properties.

[sea-tax]

The IRS Pub 946 shows "sewers" as Land Improvement, 15 years. I use 15 years on my clients with rental properties.

Jiggers and Jim you both for a second made me acutally look up the pub and read it carefully. Because from my original post I was really shooting from the hip so to speak.

You are both right it does say sewers and that it is 15 year property. However Tax Mom was asking about a septic system. While I will agree both are similar in purpose they are infact different in definition. A Sewer is a publically owned pipe while a Septic system is owned by the home.
The pub does not as far as I can tell specifically mention septic systems. That being said I would argue that the fact that the septic system is an attached fixture to the house that it would be more prudent to classify it as 27.5 year property. While I will agree that this may be a conservative approach I think it is still the correct answer.
I would also agree that more likely than not both methods would be and could be defended easily in an audit.

[Black Bart]

See?

You're makin' progress already. Never mind me and sea-tax -- we're both strict conservatives (both taxwise and politically). These other auditor-be-danged types will save you money that we conscience-stricken puritans cannot.

Now...huppp...I have 15 years, I have 15 years, I have 15 years...do I hear five, five, five, five...gimme a five - gimme a 5. Ahhruuppp -- no bids? Alright, c'mon now, what about seven, do I hear a seven? Give me a. seven, give me a seven...seven, seven, seven...

Where's that bunch that was advocating five years instead of seven on tools a while back on the landscaper and nursery biz? And who was that arguing for it? Bob W, jainen, Veritas? Wouldn't this be a five year "hand tool" of sorts; relatively speaking? Don't you boys think IRS should cut a break for mom and apple pie?

[sea-tax]

BB you are absolutely hilarious. I mean you should really think of giving up those pain in the butt clients and try your hand at comedy. You make me laugh. I would encourage you to go try out for " the Last Comic Standing" it is a reality show on NBC

[Jiggers]

[QUOTE=sea-tax]A Sewer is a publically owned pipe while a Septic system is owned by the home. The pub does not as far as I can tell specifically mention septic systems. QUOTE]


The IRS Pub excludes "Municipal" sewers in the 15 year classification. At least it does in my book. I would go with 15 years. I doubt if an IRS agent would question this. And, if he does, he would probably back down when shown Pub 946.

[sea-tax]

[QUOTE=Jiggers]

A Sewer is a publically owned pipe while a Septic system is owned by the home. The pub does not as far as I can tell specifically mention septic systems. QUOTE]


The IRS Pub excludes "Municipal" sewers in the 15 year classification. At least it does in my book. I would go with 15 years. I doubt if an IRS agent would question this. And, if he does, he would probably back down when shown Pub 946.

I agree the PUB does exclude Municipal sewers. I never talked about that. What I am refering to is that the reference which you sited olny refers to sewers and because Tax Mom refered to it as a septic system it is possibly a different item.

All I know is most IRS agents I have dealt with have been by the book sorts. In the pub it clearly says sewers and not septic systems and this may pose a problem. Maybe if they meant to include septic systems they would have said that.

[S T]

Where Is Abby?

Abby has a depreciation reference book, that would certainly be handy on this issue.

If you refer to Pub 527 online http://www.irs.gov/publications/p527/ar02.html under examples of Improvements Section, under Plumbing is listed Septic Systems. Page 3 in PDF form.

So going a step further researching depreciation of septic systems for Residential Rental, I found that one site I viewed claimed septic systems under improvements would be depreciated over 15 years, because it is a land improvement and possible plumbing. but then the IRS Pub 527 on page 9 seems to refer to 27.5 years.

As a point of reference I found that Calif FTB considers installation of a septic system to "materially" add value to the property and therefore would be an improvement and would be depreciable at the same rate that the property was being depreciated, i.e. 27.5.

So there does not seem to be a definite method, either 15 years or 27.5 years as the property.

Hopefully Abby will post and provide further direction based on her depreciation reference manual.

Sandy

[abby]

timing

To be frank, I am in the middle of changing jobs, and my much-loved reference book is at the other location - where I will be on Friday.

I am planning to have a look - and I'll report on what I find, hopefully not too late to be of some help.

Currently, I'm putting my money on 27.5

[Unregistered]

I'm going with 15:

Miller, Joe O., et ux. v. Commissioner (February 14, 1989)


United States Tax Court

JOE O. MILLER and DEBRA MILLER,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent


Tax Ct. Docket No. 38852-87
Doc 1989-1288
Decided: February 14, 1989
Cite(s): T.C. Memo 1989-66
56 T.C.M. 1242
Judge(s): Couvillion, opinion
Principal Code Section Reference(s): Section 168


Summary


Provided by Tax Analysts. Copyright 2006 Tax Analysts. All rights reserved.

CONVERSION OF GARAGE TO DENTIST OFFICE NETS NO ITC; OFFICE FURNISHINGS MUST BE DEPRECIATED OVER FIFTEEN YEARS.

Joe Miller retired from the United States Air Force and set up practice as a dentist in Dripping Springs, Tex. Miller bought a house with a detached garage, which he had renovated and enlarged for his business. He paid nearly $6,000 for a septic tank system that served his home and the office. He also paid $36,800 to have the garage turned into a dental office, complete with furnishings. Miller claimed an investment tax credit (ITC) for the sewage system. He classified the sewage system and the office furnishings and attachments as five-year property for depreciation purposes.

The Service determined a deficiency, asserting that the sewage system was not tangible personal property eligible for the ITC. It also asserted that the system was 15-year property for depreciation purposes and was not depreciable to the extent of its use in serving Miller's residence. The Service charged that the cabinets, benches, shelves, and other attachments in Miller's office should be depreciated over the course of 15 years. Miller petitioned the Tax Court, arguing that the septic tank system constituted tangible personal property since it could be moved. Even if it were not section 38 property, Miller argued, it should be treated as five-year property since the local government may require attachment to a central sewage system within five years. He also argued that the office furnishings deserve five-year depreciation.

Tax Court Special Trial Judge Couvillion has held that the sewage system is not tangible personal property. The court cited Everhart v. Commissioner, 61 T.C. 328 (1973). The court ruled that the septic tank system is permanent and subject to 15-year depreciation. Citing Miller's lack of documentation and the nature of the office components, Judge Couvillion held that Miller is entitled to five-year depreciation of cabinets and benches. The court sustained the Service's determination that the remainder of the office assets should be depreciated over 15 years.

[Roland Slugg]

FWIW I'll join the 15 camp

Although I would hardly consider a septic system or a sewer to be a land "improvement," like a fence, parking lot or landscaping, I believe it is so similar to a [non-municipal] sewer, as specified in classification 00.3 in Pub 946, that I'm comfortable going with 15 years. The items described in most categories in Pub 946 are meant to be examples, not exhaustive, all-inclusive lists.