depreciation on rental cabinets

[joanmcq]

What life would you use for kitchen cabinets in a rental? 27.5 or 5 years?

[GeorgeM]

What life would you use for kitchen cabinets in a rental? 27.5 or 5 years?

How many years depreciation left on the house. I normally would use the 15 or 10 depending on the balance left on the house.

[joanmcq]

Fully depreciated.

[kcjenkins]

Unless it was a major kitchen remodel, I'd expense them, myself. Unless the client does not need the writeoff, of course. But if you depreciate them, it's 27.5.

[RoyDaleOne]

* 5-YEAR PROPERTY. This class includes computers and peripheral

equipment, office machinery (typewriters, calculators, copiers,

etc.), automobiles, and light trucks.

This class also includes appliances, carpeting, furniture, etc.,

used in a residential rental real estate activity.

[michaelmars]

VOTE 5 YEAR TOO

[joanmcq]

KC, what's your rationale for expensing? I don't think the old ones were trashed, ie unusable. Of course, the client would love to expense 'em or at least not have to depreciate over 27.5 years. Being as they are up there in years, I don't think they will see the end of 27.5 years!

[RoyDaleOne]

To expense it could be a repair. If it does not extend the useful life of the structure and it is not part of a "major" remodel then the items are eligible for categorizing as repairs. Most roof repairs can be expensed as an example.

[jainen]

>>If it does not extend the useful life of the structure and it is not part of a "major" remodel <<

Those are not the only criteria. It is also a capital asset if it provides a new use, such as new (not restored) design or upgraded materials. That is more usual in owner-occupied than rental property, but lots of old rentals have functional obsolescence in the kitchen so are upgraded to fit current market demand. In that case the intention is to increase the rental value, which is clearly one of the tests for capitalization. (It does not have to be a "major remodel," which is a way to describe a group of repairs as well as a complete makeover.)

[joanmcq]

Oh well, I'm trying. My first gut is to depreciate over 27.5 years, but I thought I'd put it out in case I was thinking wrong, like I was for interior paint all these years.

[kcjenkins]

Well, much as I would like to say use 5 years, cabinets are not like appliances, they are attached to and become part of the building itself. The thing is, if it is a repair, which is normal in many rental properties, then it can be expensed. If it is a major change, like a total kitchen remodel, then it has to be capitalized. But just replacing old or broken cabinets with similar new cabinets, would, IMHO, be a repair, not an upgrade.

[joanmcq]

Ok, so the question is 'were they old and broken down?'.

[MAMalody]

Actually the question is: was this a complete or major remodel of the kitchen?

[OldJack]

Actually the question may be: What are the odds of an audit?

I agree with KC's analysis and definition.

[BulldogTom]

I'm with Old Jack. It is not what you think, but what you can prove at audit. Just because it is explained as a repair, you need to be able to document that fact. I agree with KC also, her analysis is right on, but there needs to be some kind of documentation added to make your point defensible at audit. Pictures of before and after would be nice.

Tom

Nashville, TN (for 1 more day)

[joanmcq]

Oldjack, I am not of the 'what are the odds of an audit' kind of person. I'm just asking questions, since I was a little overly conservative on some of my rental depreciating, and wanted to get some feedback regarding cabinets. Like I said, my first instinct (and the way the return is prepared at the moment) is depreciating at 27.5 years. So the question to me is why they replaced them. I bought a rental where half the drawers were missing and the countertops were broken...even a 'complete remodel' on that property could easily have been considered a repair..but I depreciated the bathrooms when 2 of the 4 apartments had to be gutted because they were so bad (and the other 2 were half-gutted). So my question to the group was is there an instance where you would NOT depreciate over 27.5 years, and am weighing the advice I've been given. KCs gets a lot of weight because I really respect her opinion. So actually the question is, what is the reason for the remodel, and what was the condition of the kitchen. And most likely, I'll keep it at 27.5 years.

[michaelmars]

why? take 5 year and if the irs a] audits you, b] picks that item to question, c] doesn't accept your answer only then you will have to amend to 27.5 and you will be where you are willing to start out at. It is ok to be aggressive as long as you have a defendable basis for your decision. If you start out at 27.5 you already did the work of the irs. One thing you didn't mention is the dollar amount you are talking about. In the scheme of things is it even a number to worry about?

Just the fact that you got so many different opinions here should show you that there isn't a cut and dry answer and you have an argument for using a shorter life than 27.5.

-good luck

[kcjenkins]

I'm guessing, from the fact that the building itself is already fully depreciated, that this was a repair of old or broken cabinets. And also, because it is a rental, odds are that it was not a full 'remodel' of the kitchen, or Joan would be talking about a lot more than just 'cabinets'. Given those two things, I'd certainly go for expensing the cost. But only Joan knows how much $$$ we are talking about, and that, and how it relates to the rental income, is what we would need to know to make a final decision.

If we are talking about $3000 worth of cabinets, in a house that rents for $2000 a month, for example, that, to me, says 'REPAIR' very loudly. But if it rents for $200 a month, that might tend more to capitalization. And if the cost of the cabinets was $15,000, that also would at least tend toward capitalization. Even so, if it was only replacing cabinets, I'd go for 7 years, not 27.5, as fixtures.

[jainen]

>>what you can prove at audit.... there needs to be some kind of documentation<<

In my opinion both of these statements violate professional ethics as established by Circular 230. The IRS is very clear that the possibility of audit can NOT be considered in determining a tax position. At the same time, the tax preparer has no obligation to document the client's circumstances (except when specifically required by the regulations). I support both of those Circular 230 proscriptions.

All you have to do is ask the client to describe the work done, including the reason. Repairs that are part of a major remodel must be depreciated, but that does not mean capital improvements not part of a major remodel can be expensed. Still, there's quite a bit of fudge room, and you can't assume that expensing is necessarily the "best" thing. For example, if the owner plans to sell or refinance, excessive costs on the financial statements may be a problem.

[joanmcq]

Ok, they are not a huge expense (I think $3-4K is it including labor; I don't have the file in front of me) and the house rents for $1000/month. I will ask how old they were, why the tenants got cabinets before the owner did (client's wife's complaint) and if it was a full remodel, or what the extent of the remodel was.

this reminds me of what I tell my tenants....you'll get heat when I get heat dammit! somehow they always get heat, while I'm still freezing from lack o'insulation and leaky windows though....

[joanmcq]

adding on info:

new cabinets were from IKEA; had to be replaced becasue the old ones were falling apart & had dry rot. Kitchen had dry rot, some black mold behind cabinets. new flooring. so a remodel; definitely not top of the line. everything in there was original (so 50-60 years old). repair? remodel? Client said anything would be an upgrade from what was in there, and the kitchen had to be brought up to code. I do get to break a stove out of the total (see what you get when you interrogate your clients? after tax season?

[joelgilb]

If its an integral part of the building and is attached and not easily moved it is an improvement. Replacing all the cabinets, not repairing a few or repairing a door or drawer front is not a repair.

And if it is structurally attached to the building ... 27.5 years.

[BulldogTom]

If its an integral part of the building and is attached and not easily moved it is an improvement. Replacing all the cabinets, not repairing a few or repairing a door or drawer front is not a repair.

And if it is structurally attached to the building ... 27.5 years.

Can't agree with that. The mold needed to be taken care of to maintaIn the ability to rent the home. I definately go with repair now. With black mold, it had to be removed, and the cabinets had to go, along with the floor to get the dry rot.

I would not hesitate anymore. I am firmly in the repair column.

Tom

Nashville TN (for 18 more hours)

[michaelmars]

look at it this way, did the rent go up because of the new and improved cabinets?, if this were a sec 8 housing would the goverment qualify the cabinets for a capital improvement rent increase? Or did you just replace a few broken down cabinets but leave the old aged floors, ceiling, appliances in place?

[michaelmars]

$3000, Our professional time answeriing this thread already cost more than that! <wink>