Most appliances' expense must be depreciated rather than deducted.
In many competitive real estate markets, landlords operate on a slim profit margin as they repay rental property mortgages in hope housing costs will increase and allow for increased rents in the future. In these situations, saving a few hundred dollars a month may mean the difference between a successful real estate investment and one that's in the red. Managing taxes by proper deductions and depreciation of improvements and maintenance on items such as appliances can help maximize an investment's profitability.
Deduction Rules
In most cases, tangible personal property can't be claimed as a deduction for landlords, even when it's used solely by tenants or in the service of maintaining rentals. In addition to appliances, tangible personal property includes furnishings provided for furnished units, lawn mowers, and any other item not permanently and physically attached to the property. Rather than allowing landlords to deduct the entire cost of these expenses in the year in which they were purchased, the Internal Revenue Service requires landlords to claim depreciation over a multiyear schedule.
Depreciation Schedule
Although residential property depreciates on a 27.5-year schedule, personal property and certain items purchased for rental use such as appliances depreciate on a much shorter lifespan. For appliances purchased after 1987, the IRS allows landlords to claim deductions over a five-year depreciation schedule using its Modified Accelerated Cost Recovery System, which allows landlords to deduct a percentage of the cost of the appliance each year for five years. The percentage for depreciation varies for each year the appliance is in service, and is as high as 32 percent its second year and as low as 5.76 percent its final year as of tax year 2010.
Improvements
Landlords who make improvements on their property that include appliances may deduct the entire cost of the appliance that tax year as improvement costs. Improvements must be made to increase the value of a property, such as adding a dishwasher to a unit that previously didn't have one. Merely replacing worn-out appliances is considered maintenance, and does not qualify for improvement-based deductions, even if they're superior models than the original models, unless the replacement was part of a major kitchen remodel.
Section 179 Deduction
Commercial property owners -- companies that own rental properties as opposed to individuals who own the properties they rent -- may be eligible to claim deductions on appliance purchases, classifying them as Section 179 property. Commercial property owners may qualify to deduct up to $500,000 in property purchases, including appliances, in 2010 and 2011. Personal estates and trusts may not make deductions based upon Section 179, so most private landlords who have not incorporated will not be able to take advantage of this deduction.
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