Do you own a rental property? Big changes for 2014!!

[specklebang]

basically, you compute the adjusted value of the unit (ie cost less accumulated depreciation on the unit) and deduct that from your income as a capital loss.

I think were having a terminology misunderstanding. My question is specific to an a/c unit that came with a rental property I bought. I didn't identify the a/c unit as having its own value. So, I paid $45K for the unit and painted, carpeted, replace toilets and what ever for $5K before I rented it out. Now, the a/c units are of varying and unknown ages. So, in my world, I have $50K invested and if the house is sold 25 years from now, I understand that the 50K will have been depreciated so if it is sold for $100K, I'll owe tax on $100K, 50 cqp and 50 gain.

Now, this year the a/c unit dies and I replace it for $3500. There is no added value, the house is not habitable without an a/c unit. In the old world, I would expense $3500 under repairs so if my net revenue was $4800, I would only have final net revenue of $1300 and would pay tax on $1300.

Now (assuming I'm not completely confused), I would have to add that $3500 to the cap cost, meaning I'm now depreciating $53,500 over the remaining 25 years. So, I'll pay taxes on $4800 but I'll really only earn $1300. Thus, the tax may result in zero real world income.

Sure, if I lived another 27.5 years and sold the place, I'll have a lower capital gain liability. But my current taxes are ordinary income so you can see how I'm screwed. I'll be losing money now and waiting 27 years to recover it. Of course, I don't just have one house or one income source but that's kind of besides the point.

 

[sangha]

I think were having a terminology misunderstanding. My question is specific to an a/c unit that came with a rental property I bought. I didn't identify the a/c unit as having its own value. So, I paid $45K for the unit and painted, carpeted, replace toilets and what ever for $5K before I rented it out. Now, the a/c units are of varying and unknown ages. So, in my world, I have $50K invested and if the house is sold 25 years from now, I understand that the 50K will have been depreciated so if it is sold for $100K, I'll owe tax on $100K, 50 cqp and 50 gain.

Now, this year the a/c unit dies and I replace it for $3500. There is no added value, the house is not habitable without an a/c unit. In the old world, I would expense $3500 under repairs so if my net revenue was $4800, I would only have final net revenue of $1300 and would pay tax on $1300.

Now (assuming I'm not completely confused), I would have to add that $3500 to the cap cost, meaning I'm now depreciating $53,500 over the remaining 25 years. So, I'll pay taxes on $4800 but I'll really only earn $1300. Thus, the tax may result in zero real world income.

Sure, if I lived another 27.5 years and sold the place, I'll have a lower capital gain liability. But my current taxes are ordinary income so you can see how I'm screwed. I'll be losing money now and waiting 27 years to recover it. Of course, I don't just have one house or one income source but that's kind of besides the point.

OK, I see

I just went through the notice again, and I still can't tell you for certain. There is one section that gives an example just like yours (replacing an AC unit that has died) and it says it must be capitalized because the AC is considered a part of the building itself. But another part says you don't have to capitalize it if you weren't depreciating the previous unit, and are not taking a loss on the old AC. What it comes down to, I *think*, is whether the depreciation you've been taking on the house as a whole unit is considered to include depreciation on the AC too. IOW, if the $45K purchase price that I assume you've been depreciating is assumed to include the AC unit. That's something I really have no idea about.

However, I noticed that part of the notice states that this is according to the regs issued back in 2008. Just saying, it doesn't seem like anything new. As far as I know (which isn't much), standard accounting requires, and has always required, the capitalization of investments (as opposed to expenses)

 

[specklebang]

OK, I see

I just went through the notice again, and I still can't tell you for certain. There is one section that gives an example just like yours (replacing an AC unit that has died) and it says it must be capitalized because the AC is considered a part of the building itself. But another part says you don't have to capitalize it if you weren't depreciating the previous unit, and are not taking a loss on the old AC. What it comes down to, I *think*, is whether the depreciation you've been taking on the house as a whole unit is considered to include depreciation on the AC too. IOW, if the $45K purchase price that I assume you've been depreciating is assumed to include the AC unit. That's something I really have no idea about.

However, I noticed that part of the notice states that this is according to the regs issued back in 2008. Just saying, it doesn't seem like anything new. As far as I know (which isn't much), standard accounting requires, and has always required, the capitalization of investments (as opposed to expenses)

Well, I'm glad you see my concern. I just heard about this from the OP and thus assumed it was new or revised. Until now, I assure you I expensed everything, not to "beat the system" but because in the real world, these are REPAIR EXPENSES and now I'm not sure what that ends up meaning.

Since it (per you) is from 2008, I can see that Bush did this. After he blew up the WTC and made a few billion off Iraq, he no doubt wanted to be sure that we evil landlords (Scrooge, not Cratchet) picked up the tab which proves without a doubt that Obama is not at fault:roll:

OK, as usual, we're having some fun but I think any landlords here need to try to figure out if this is a change or not.

 

[sangha]

Well, I'm glad you see my concern. I just heard about this from the OP and thus assumed it was new or revised. Until now, I assure you I expensed everything, not to "beat the system" but because in the real world, these are REPAIR EXPENSES and now I'm not sure what that ends up meaning.

Since it (per you) is from 2008, I can see that Bush did this. After he blew up the WTC and made a few billion off Iraq, he no doubt wanted to be sure that we evil landlords (Scrooge, not Cratchet) picked up the tab which proves without a doubt that Obama is not at fault:roll:

OK, as usual, we're having some fun but I think any landlords here need to try to figure out if this is a change or not.

I really doubt any president has spent any time sitting down with the IRS employees who are writing these regs.

And as far as expensing everything, I can understand why you would see it that way, and want to expense everything. However, that's not how it works, nor has it ever worked that way. At least, not in our lifetimes.

Here's a bit that traces it back to court decisions dating back to 1926

The United States Supreme Court has recognized the highly factual nature of determining whether expenditures are for capital improvements or for ordinary repairs. See Welch v. Helvering, 290 U.S. 111, 114 (1933) (“decisive distinctions [between capital and ordinary expenditures] are those of degree and not of kind”); Deputy v. du Pont, 308 U.S. 488, 496 (1940) (each case “turns on its special facts”). Because of the factual nature of the issue, the courts have articulated a number of ways to distinguish between deductible repairs and non-deductible capital improvements. For example, in Illinois Merchants Trust Co. v. Commissioner, 4 B.T.A. 103, 106 (1926), acq. (V-2 C.B. 2), the court explained that repair and maintenance expenses are incurred for the purpose of keeping property in an ordinarily efficient operating condition over its probable useful life for the uses for which the property was acquired. Capital expenditures, in contrast, are for replacements, alterations, improvements, or additions that appreciably prolong the life of the property, materially increase its value, or make it adaptable to a different use. In Estate of Walling v. Commissioner, 373 F.2d 190, 192-193 (3rd Cir. 1966), the court explained that the relevant distinction between capital improvements and repairs is whether the expenditures were made to “put” or “keep” property in efficient operating condition. In Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333, 338 (1962), nonacq. on other grounds (1964-2 C.B. 8), the court stated that if the expenditure merely restores the property to the state it was in before the situation prompting the expenditure arose and does not make the property more valuable, more useful, or longer-lived, then such an expenditure is usually considered a deductible repair. In contrast, a capital expenditure is generally considered to be a more permanent increment in the longevity, utility, or worth of the property.

Blame Pres. Coolidge

 

[specklebang]

I really doubt any president has spent any time sitting down with the IRS employees who are writing these regs.
And as far as expensing everything, I can understand why you would see it that way, and want to expense everything. However, that's not how it works, nor has it ever worked that way. At least, not in our lifetimes.
Here's a bit that traces it back to court decisions dating back to 1926
Blame Pres. Coolidge

Coolidge? Wasn't he the Fast & Furious guy in charge of Benghazi who wrote the ACA while scrutinizing Tea Party tax-free organizations?

Yeah, he's a perfect example of what happens when you let minorities into the WH.

So, why has this tax thing come up now? Just because of the OP? Or are there some tax law changes or implementations that are recent enough to pin on Bush?

 

[sangha]

Coolidge? Wasn't he the Fast & Furious guy in charge of Benghazi who wrote the ACA while scrutinizing Tea Party tax-free organizations?

Yeah, he's a perfect example of what happens when you let minorities into the WH.

So, why has this tax thing come up now? Just because of the OP? Or are there some tax law changes or implementations that are recent enough to pin on Bush?

Because the IRS has decided to clarify some of the rules, and the usual suspects are using it to whine about the Nanny State

And if you really want to pin it on someone, it shouldn't be too hard. The IRS (and FASB and GAAP) issue thousands of pages of these kinds of rules every year