Depreciation of A/C Unit

[DTS]

I have a client who owns a rental unit, 1400 sq. ft. In '04, he had to replace the 3-1/2 ton capacity A/C unit. As I read the rules, it appears that I may be able to depreciate the unit under MACRS Cost Segregation, as all the criteria for being able to do this is met.

Can I and if I can, how many years can I depreciate this unit? 10-15 years?

Thank you, Dennis

[Bees Knees]

If it is a portable A/C unit that can be moved, and it is used in a rental real estate activity, then it is 5 years MACRS. If it is a central A/C unit that is attached to the building, it is 27.5 year property.

[S T]

?? Central A/C Units

Question, why is replacement of a central A/C unit in a residential rental (single family dwelling) considered to be structural. I realize that the vents and electrical are structural, (as that is through walls, inbetween floors,etc) but what about the mere replacement of the unit itself. In the West Coast the units are usually positioned outside, on a separate slab and can easily be removed from the connection to the venting and the electrical source.

Most A/C units, particularly in Calif will not last more than about 15 - 20 years maybe, and then there are all of the energy incentives to replace because of technology.

Could this not be cost segregated to maybe 10-15 year property as replacement.

From AICPA cost segregation article. I realize that the following quote states"components of" [quote]Treasury regulations section 1.48-1(e)(2) classifies as structural components any property that “relates to the operation or maintenance of a building,” and includes, by way of example, parts of a building (walls, floors and ceilings), as well as any permanent coverings (paneling, windows and doors), components of a central air conditioning or heating system (motors, pipes and ducts), plumbing and fixtures (sinks and bathtubs), electrical wiring and lighting fixtures, stairs and elevators and sprinkler systems
In distinguishing between a building’s tangible personal property and structural components, CPAs will find the courts to be a final source of guidance. In Whiteco Industries, Inc. v. Commissioner (65 TC 664 (1975)), for example, the Tax Court set forth the following six questions CPAs can use to determine whether property is inherently permanent and thus a structural component excluded from the definition of tangible personal property:[ /quote] I have made notations after each of the questions

Can the property be moved? Has it been moved? (For example, a shed with a concrete floor vs. a shed with a wooden floor.) a/c unit can be moved either for replacement much like a stove or dishwasher or moved to another location

How difficult is removal of the property, and how time-consuming is it? (For example, a wine cellar vs. a prefabricated photo-processing lab.) unit can be disconnected and moved re- installed in approximately 3 hours time

Is the property designed or constructed to remain permanently in place? (For example, a wooden barn vs. a wire chicken coop.) I would not think permanent as it can easily be replaced or relocated

Are there circumstances that tend to show the expected or intended length of affixation—or that the property may or will have to be moved? (For example, permanent concrete pilings vs. floating docks that can be removed in the winter.)
lifespan of unit - repair cost could be more than cost of new unit, parts availability for repair, obsolete would lend to replacement, again much the same as an appliance
How much damage will the property sustain upon its removal? (For example, a steel-encased bank vault vs. an easily removable lighting system attached by bolts.) no damage to property of removal whether replaced or unit removed (this does not reflect on vents and ducts, etc

How is the property affixed to the land? (For example, permanently glued bathroom tile vs. removable billboard.) unit sits on cement slab outside of property and connected to ducting, easily removed without damage

Even with ample regulatory, legislative and judicial guidance, making the distinction between tangible personal property and a building’s structural components remains a challenge for CPAs. No bright-line test exists. What is fortunate, however, is that many of the factual issues involving properties of different sorts have been litigated, and their outcomes illuminate the direction a court confronted with similar facts is likely to take. Examples of how the courts viewed various categories of property are provided in “Categorizing Property: Court Rulings,” below.

unfortunately I could not find one for an air conditioning unit installed in a residential rental property.

The West Coast might be unique in their air conditioning units for residences, in that they sit outside on a cement slab and connect to the ducting and electrical from the outside. They are easily replaced. In some areas, older units might even be installed on the roof, but in any case of installation, they can easily be removed with no damage to the building structure. I have actually seen older homes here in Calif (40 years+) rather than remove the old unit, the installers have actually disconnected then reinstalled a new unit outside thereby eliminating damage to the structure.

Thoughts would be appreciated on this.

Sandy

[Unregistered]

ST-Great response!

I really like your professional style.

It sure beats 'Off the top of my head, etc"

Ron, EA

[Armando Beaujolais]

ST quoted the correct citation.

It's a facts and circumstances issue. Classification does not depend on the specific item in question.

I read a couple of court cases recently that dealt with raised floors being constructed in buildings to make room for computer wiring, etc. In one case the raised floor was considered to be a structural component of the building mostly because it would take extensive construction work to remove it and extensive work to renovate the space after it was removed. In the other case the floor was capable of being removed without wrecking the surrounding space, and it was allowed to be segregated.

[DTS]

A/C unit

Sandy

First, I want to thank you, Bees, Armando and many others for all of your "professional answers". Great help to many of us!

Before I posted yesterday, I looked up the cites for this and concluded everything you quoted and added to each possiblity. Living in CA, units do not last that long, as you stated.

I understand what Bees is saying, window a/c vs. central unit, but after reading Armando's Court case, I would be inclined to lean this way (I'm not taking sides!). I say this due to the ease in which this unit was removed and replaced. In less than 1-1/2 hours, off the truck to final install.

I'll talk to my client and tell him what all of the responses were. I may post again.

I'm not really sure which way is the best. Maybe, it's a crap-shoot???

Dennis

[Bees Knees]

If you look at IRS Market Segment Specialization Program number 88 on Cost Segregation Audit Techniques Guide, dated April 30, 2004, you will note that the IRS audit position is that a central air conditioning unit that is part of the heating and ventilation system of a building is considered a building component with a 39 year life. I realize that does not necessarily mean it will hold up in court, but you can be sure an IRS auditor that has read that report is not going to leave you alone if you do not treat it as a building component.

[RLymanC]

Depreciation of A/C Unit

To follow up on BeesKnees

The below is 5 year depreciation

Only separate HVAC units that meet the sole justification test are included (i.e., machinery the sole justification for the installation of which is the fact that such machinery is required to meet temperature or humidity requirements which are essential for the operation of other machinery or the processing of materials or foodstuffs.) HVAC may meet the sole justification test even though it incidentally provides for the comfort of employees, or serves, to an insubstantial degree, areas where such temperature or humidity requirements are not essential. Includes refrigeration units, condensers, compressors, accumulators, coolers, pumps, connecting pipes, and wiring for the mechanical equipment for climate controlled rooms, walk-in freezers, coolers, humidors and ripening rooms. Allocation of HVAC is not appropriate.

[S T]

Central Air Residental Rental

While I understand that they want us to add (in this particular discussion) central air conditioning units as part of the structure, both Bees and RLyman's replies seem to refer to Business Property (39 years) not Residential Rental Property at 27.5 years and probably the cost factor is substantial for a business application versus a residential application.

It would generally seem that the cost segregation method might be more efficiently used in Business Properties, however, I do see somewhat of a need for it in Residential Rental Properties, such as carpet, appliances, window coverings (not windows), etc.(all generally replaced within 5-7 years) and the topic of this discussion "replacement" central air conditioning units, that are easily replaced and generally are replaced every 15 years or so.

As the prior post on the AICPA article states, it generally will be the courts final decision if in fact a taxpayer is willing to take the deduction under the cost segregation guidelines and IRS chooses to challenge.

In this case, the total cost is $1,050 so the tax deduction is mute either which way the depreciation is taken. The question being whether or not it is feasible to cost segregate a "replacement" central air conditioner unit (not the ducting, electrical, etc) under Section 1245 for a lesser term than 27.5 years separate from the underlying structure, and if it is feasible to do this, what term of depreciation would you use 7,10 or 15???

Sandy

[Bees Knees]

If you are going to take the position that it is not a building component, subject to the 27.5 year life, then it would have to be treated like your stove or washer, which is 5 year property for rental activities.

[S T]

A/c Unit

Thanks Bees, the cost segregation issue is interesting and probably will be challenged more in the years to come.

Seems unfair to the small taxpayer with residential rental property that they have to include the a/c unit replacement under 27.5 years.

Hopefully we will receive more definitive guidelines on items as they are challenged at the IRS and court levels.

So for this client $38 per year.

Sandy

[jainen]

the old a/c

When he bought the building did he say the old a/c was not part of the building? If it was an appliance instead of real estate it should be valued separately on the purchase contract and no doubt the mortgage would not include that personal property. Or does he have a reason for treating the replacement differently?