[IwannabeaCPA2017]

Hey All,
so this is a real life tax question that I couldn’t really find anything on google. A client has upgraded his rental property and I think the cost should added onto his basis of the property rather than capitalizing it. Is this right treatment? Or can anyone point me to the code section? Thanks

BEC- PASS (Expiring in DEC 2017)

REG- PASS (Expiring Feb 2018)

AUD- PASS (Expiring Oct 2018)

FAR- 65, 60, 59, 77!!! -GOD BLESS

If I can do it, anyone can do it!

 

[Bourne]

I work in real estate. What specifically did he add on to the property? In any event, I'm pretty sure the only way something can increase his basis in the property would be the costs he incurs at the time of purchase (legal fees, cost seg study, loan costs, etc).

AUD- 82
REG- 86
FAR- 86
BEC- 88

[runegoblet3xx]

I work in tax. Is this a residential or commercial rental property? I'm assuming residential, probably.

Most important, as Bourne has already asked, what specifically did he add to his property? Did he upgrade it with new appliances? Did he add an addition? Did he repair a roof?

The items such as I listed above can still be capitalized, and technically they do add basis to the property. It just depends on when that rental is sold, and therefore the accumulated depreciation, that'll determine his gain.

Here's the general IRS publication on residential rentals:
https://www.irs.gov/publications/p527

There's several subsections that might answer more of your questions.

AUD - 78
BEC - 83
FAR - 79
REG - 89

"Success is not final, failure is not fatal: it is the courage to continue that counts."

[IwannabeaCPA2017]

Hey guys, thanks for the response. To answer it is a residential rental property what the guy added was a septic tank and that was all he did ( I believe this was an upgrade to his current one)-so not something brand new installation per se. Ill look into that IRS publication, Thanks again!!

BEC- PASS (Expiring in DEC 2017)

REG- PASS (Expiring Feb 2018)

AUD- PASS (Expiring Oct 2018)

FAR- 65, 60, 59, 77!!! -GOD BLESS

If I can do it, anyone can do it!

 

[Bourne]

If it were me, I'd capitalize it as opposed to directly adding to the basis. You'll have to report back here with your findings/determination!

AUD- 82
REG- 86
FAR- 86
BEC- 88

[IwannabeaCPA2017]

Thanks Bourne, will do!

BEC- PASS (Expiring in DEC 2017)

REG- PASS (Expiring Feb 2018)

AUD- PASS (Expiring Oct 2018)

FAR- 65, 60, 59, 77!!! -GOD BLESS

If I can do it, anyone can do it!

 

[TommyTheCat]

you capitalize it and depreciate it. it is its own unit of property so you can depreciate it under a more favorable life than 27.5 years. Don't add it to the basis of the property.

AUD - 85
BEC - 89
FAR - 91
REG - 97

[Juice23]

TommyTheCat is right. The septic tank will have its own basis. Shouldn't be hard to find out what the depreciable life is. Also, make sure you capitalize the total cost of the installation – materials plus labor.

AUD - NINJA in Training
BEC - NINJA in Training
FAR - 78
REG - NINJA in Training

BBA, MA, MA.

"Philosophy is a battle against the bewitchment of our intelligence by means of language." - Wittgenstein

[CPAwannab]

isn't that both? you add it to the basis of the property and depreciate it over whatever appropriate period for the improvement.

BEC 79

FAR 78

AUD 88

REG 83

[Juice23]

technically, maybe. the question seemed to assume these were different things: “A client has upgraded his rental property and I think the cost should added onto his basis of the property rather than capitalizing it.” Adding something to the basis is not always the same as capitalizing, but in this case it probably makes little practical difference how you describe it.

AUD - NINJA in Training
BEC - NINJA in Training
FAR - 78
REG - NINJA in Training

BBA, MA, MA.

"Philosophy is a battle against the bewitchment of our intelligence by means of language." - Wittgenstein

[TommyTheCat]

capitalizing it into the basis of the property in my opinion means its a part of the building and thus needs to adhere to the depreciable life of the building…for res rental 27.5 years. so by that definition no it does not get capitalized into the basis of the property, but rather gets capitalized as a separate fixed asset connected to the rental activity, and has a more favorable shorter depreciable life as a stand-alone unit of property.

I think i understand where you are coming from CPAwannab…since both technically involve capitalizing the cost. It can be confusing, but the right answer is capitalize it and depreciate it over its own proper MACRS useful life, which I dont care to look up the MACRS charts right now after a few glasses of wine.

AUD - 85
BEC - 89
FAR - 91
REG - 97

[IwannabeaCPA2017]

Correction: it wasn't a septic tank it was a septic drain field which is installed underground. I'm still looking into the IRS code to find the proper treatment. As it is underground I'm unsure if I can still capitalize as a separate FA as mentioned by @Tommy. Ill do more research and update here upon finalizing with my supervisor. This is why Tax is so interesting because different treatment provides different benefits for the client 🙂 Thanks all!

BEC- PASS (Expiring in DEC 2017)

REG- PASS (Expiring Feb 2018)

AUD- PASS (Expiring Oct 2018)

FAR- 65, 60, 59, 77!!! -GOD BLESS

If I can do it, anyone can do it!

 

[TommyTheCat]

@iwannabeaCPA2017 – ah got it good luck with the research. I suggest you focus on the concept of the definition of unit of property, that concept was the big change from the repair regs that came out back in 2015 or so…provided you can meet the definition of the septic drain being its own unit of property separate from the building you should be able to depreciate it over its shorter useful life.

As an example, an HVAC system is installed on a commercial building. One might think this system is attached to and built into the building so therefore its a part of the building and must be depreciated using the same useful life of the commercial building (39 years). In fact, the HVAC is its own separate unit of property and eligible to be depreciated on its own useful life, not tied to the 39 year straight line method, and is eligible for MACRS depreciation (typically double declining balance, versus straight line).

If I had to make an educated guess I would guess that your research will prove that the septic drain is its own unit of property.

AUD - 85
BEC - 89
FAR - 91
REG - 97

[Juice23]

If you're going to be doing a lot of work on fixed assets, including rental property or commercial property, I'd recommend becoming familiar with Cost Segregation. Basically, cost segregation allows you to break up the cost of a building or other property into its constituent parts for tax purposes. Rental property might depreciate at 27.5 years, but if you add solar panels to the roof they will depreciate over 5 years, of if you decide to build a pool it might depreciate over 15 years. I am not that familiar with residential/rental property, but in commercial real estate this is all but required for due diligence. I work in renewable energy where the results of a cost seg often makes or breaks a financing arrangement because of the favorable tax treatment for energy property.

AUD - NINJA in Training
BEC - NINJA in Training
FAR - 78
REG - NINJA in Training

BBA, MA, MA.

"Philosophy is a battle against the bewitchment of our intelligence by means of language." - Wittgenstein

[Recked]

to further complicate matters on the above example. if there was an old HVAC system in place that was still being written off, once a new system is placed in service the old system would be completely written off in the current year, which may or may not result in a Form 3115 change in accounting election. (This was a big topic a year or 2 ago)
The reason for this is that one building should have duplicates of the same system on the books. HVAC is a bad example, but its easier to understand if it was a roof.
If a roof is done and being depreciated over the life of the building, 39yrs for commercial, but then needs to be replaced after 20 years, in the past the old roof was still being depreciated over its tax life, and the new roof was also depreciated over 39 years starting with the year placed in service.
This is above and beyond the scope of the exam as far as I can tell, not to REG yet.

Real world answer to your question.
What is the dollar amount and what are the clients tax goals for the current year?
If the new system is not incredibly material $$, and the repair was necessary, and the client is looking for the best possible tax position for the current year, you might be inclined to expense the cost as repairs and maintenance. Material will all depend on the other dollar amounts on the Schedule E.
If its a rental house producing 12-24k a year the repairs and maintenance $ threshold will be very different from a commercial building producing 100k in income a year.
You also need to have a conversation with the client about whether they intend to sell this property either near term or long term to see if depreciation recapture needs to be a concern, or if the increased “basis” in total assets will be a factor.

If i had a client with a rental house making 20k a year in rent, and they paid 2k for someone to lay some septic pipe for leech field/drainage, I would be hard pressed to pick up an asset of 2k to write off over 5-7 years.

Memento Mori - Kingston NY CPA & EA (SUNY Albany 2002)

FAR-93 11/9/17 (10wks, 250 hrs, Roger 1800+ MCQs, Gleim TB 600+MCQs, SIMs)
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[TommyTheCat]

recked – agreed. The de minimus safe harbor I believe is up to 2,500 now, so provided the taxpayer is making the de minimus election annually in their return they should be a-OK to write off anything under 2,500.

AUD - 85
BEC - 89
FAR - 91
REG - 97

[Author]

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