Section 179 Expensing

[Burke]

I have a Sche E residential rental client whose expenditures this year (many of which were improvements) exceed his income from the venture. It will provide a loss, but he doesn't need it. I want to use Sect 179 as much as I can, and elect out of bonus depreciation. The deduction will then be limited to the rental income and carryover to 2020 when he WILL need it. After hours of studying IRC/IRS material, it appears to me that 179 cannot be used on the majority of improvements, as it is not "qualified improvement property." If it were nonresidential property, it would be. Is this correct? It appears apparent he can use it for tangible personal property which would otherwise be subject to depreciation.

[ttbtaxes]

My understanding is that Section 179 applies to residential rentals starting in 2018.

[Burke]

My understanding is that Section 179 applies to residential rentals starting in 2018.

Can you provide a cite? See IRS Fact Sheet (FS-2018-9) dated April 2018, second paragraph.

[TaxGuyBill]

It appears apparent he can use it for tangible personal property which would otherwise be subject to depreciation.

Correct. Section 179 can now be potentially be used for non-improvements to the Residential Rental Property, such as appliances, etc.. But I said "potentially" because in order to claim §179, it needs to rise to the level of a "Trade or Business", which may or may not be the case.

Section 179 can NOT be made for improvements to the actual building (that would be depreciated over 27.5.years).


If it does not qualify for Section 179 due to the rental not rising to the level of a Trade or Business, yes, you can opt out of Bonus and use Straight-Line depreciation to minimize the deductions this year. Also, don't use the De Minimis election.


One other thought ... keep in mind the Passive Loss rules. If his income is the threshold in 2019, any losses wouldn't be able to be used in 2019 anyways. And if his income is over the threshold in 2020, deferring deductions would not benefit his 2020 tax return.

[ttbtaxes]

Thanks TGB for clarifying. Section 179 is applicable only for Section 1245 assets of residential property and if the rental rises to a trade or business. It should go hand-in-hand with Section 199A. If you're claiming that deduction, then you've determined it is a T/B. If you're not claiming the 199A deduction, then Section 179 goes away as well.

[Burke]

Thank you also for the clarifications. Two rental properties, one has loss, one has profit that exceeds the loss on the other one when netted. So no net passive loss deduction on 8582. Income does not exceed threshold for passive loss, but it is a moot point since he has net gain. 179 is disallowed unless treated as a trade or business. If treated as trade or business, QBI is disallowed as standard deduction eliminates all tax liability. Software is saying 179 not allowed on checklist, but its on the depreciation schedule and Sche E! I need to remove 179 treatment, depreciate and opt out of Bonus. Won't change bottom line at all.
I was trying to do what I could to carryover deductions to next year. Rents will be well up in 2020 over 2019 due to renovations, and repairs will be less. More SS will be taxed, and he will probably owe in 2020. It appears to me these rental properties do qualify under the safe harbor for a trade or business with 250 hours of services, etc, especially this year. TP does everything, soliciting tenants, handling repairs & maintenance, collecting rents, etc.