Rental Improvement Depreciation

[Terry D EA]

Client replaced the septic tank at one of his rental properties. Because this is betterment or extends the life of the property, does it have to be assigned a 27.5 year life using SL?

[mcb39]

I would say Yes.

[kathyc2]

I would say it falls under land improvement with  15 year MACRS which would make it available for bonus depreciation.

[BTS]

Hmm  Never had a renter do a septic.  I know with farm land that drainage tiling goes for 15 years and qualifies for bonus.  But... Septic systems usually last way longer than 15 years.  Our is 40 years old.  Proseries has a nice drop down list with recommended depreciation rates.  And they list Septic as 27.5  

[Bart]

2 hours ago, kathyc2 said:

I would say it falls under land improvement with  15 year MACRS which would make it available for bonus depreciation.

I do not think a septic improves the land maybe even the opposite.  Seems like 27.5 year property

[DANRVAN]

I use asset class 00.3 Land Improvements with a 15 year life. 

Class 00.3 includes non-municipal sewers.

A septic tank is part of a sewage system that includes pipes to the tank and pipes from the tank to the perforated pipes in the drainfield.

I  have not seen an authoritative cite to challenge this position.

The fact that a modern cement tank will last longer than 15 years is a mute point for tax depreciation purposes (they will for sure last longer than older metal tanks that were prone to rusting out).

[DANRVAN]

2 hours ago, BTS said:

Septic systems usually last way longer than 15 years. 

and farm tractors last way longer than 7 years, over the road trucks way longer than 3 years.......

[BrewOne]

There are some pre-MACRS court cases that seem to me to be of limited application.

For those who want to take a deep dive into the cesspool (sorry, couldn't resist) Publication 5712 is an IRS audit guide to capitalization.

page 27-28, looking at structural components under Building Systems are Plumbing Systems which include "Water and sanitary sewer collection equipment"

Audit guides are not authority, but looks like the IRS position would be for 27.5/39

 

[kathyc2]

It's always been my policy that in situation where the code doesn't provide a clear answer, it's up to the client if they want to be more aggressive or more cautious. 

 

[Lee B]

If you believe it's part of the plumbing system and an integral part of the structure then 27.5.

If not then you could choose 15 years.

[DANRVAN]

16 hours ago, BrewOne said:

looks like the IRS position would be for 27.5/39

And after considering Reg §1.263(a)-3 (e)(2)(ii)(B)(2) I have to agree.

The thought that a septic tank for a single dwelling rental would be classified as a Building System instead of a land improvement never crossed my mind.

[Slippery Pencil]

On 3/16/2024 at 7:09 PM, BTS said:

Proseries has a nice drop down list with recommended depreciation rates.  And they list Septic as 27.5  

Do they list pinball machines?

[BTS]

9 hours ago, Slippery Pencil said:

Do they list pinball machines?

No !!  But they do have Skee Ball machines !!   75 years !!!  Man I would love to have a Skee Ball machine !!!

[Medlin Software, Dennis]

Just so I am not depreciated before another 20 or so years.

[Slippery Pencil]

5 hours ago, BTS said:

No !!  But they do have Skee Ball machines !!   75 years !!!  Man I would love to have a Skee Ball machine !!!

I'm pretty sure nothing has a 75 year class life.

[BTS]

1 hour ago, Slippery Pencil said:

I'm pretty sure nothing has a 75 year class life.

I sure hope I do !!!  I know I have ate some stuff beyond its class life !! 

[Terry D EA]

Thanks everyone for the replies. I will pass this by the client but am kinda stuck on the 27.5 life. Client doesn't really need the bonus depreciation either. This must have been a small system as the receipt is for $3200.00. I though it should be way more than that but then again, I have always been on a city system. 

[michaelmars]

2 hours ago, Slippery Pencil said:

I'm pretty sure nothing has a 75 year class life.

You don't know my visa bill, if only paying minimum payments.

[Lee B]

4 hours ago, Terry D EA said:

Thanks everyone for the replies. I will pass this by the client but am kinda stuck on the 27.5 life. Client doesn't really need the bonus depreciation either. This must have been a small system as the receipt is for $3200.00. I though it should be way more than that but then again, I have always been on a city system. 

For that amount it sounds like a repair and maintenance

[Terry D EA]

11 hours ago, Lee B said:

For that amount it sounds like a repair and maintenance

I agree but isn't it still considered a capital expense that requires depreciation? 

[DANRVAN]

41 minutes ago, Terry D EA said:

still considered a capital expense that requires depreciation? 

I believe it would, unless it falls under the  Sec. 1.263(a)-3(h)); lessor of  $10,000 or 2% basis safe harbor rule.

[Abby Normal]

On 3/16/2024 at 5:45 PM, Terry D EA said:

Client replaced the septic tank at one of his rental properties. Because this is betterment or extends the life of the property, does it have to be assigned a 27.5 year life using SL?

Are you sure it's a betterment? Just replacing an existing system usually qualifies as a repair.

[Terry D EA]

The blurb below answers my position regarding a capital expense for the septic system. Only thing I found different is the possibility of 20 year life for septic tanks. 

The proposed regulations require capitalization of amounts paid to acquire, produce, or improve tangible real and personal property, including amounts paid to facilitate (closing costs) the acquisition of tangible property. Amounts paid to repair and main property and equipment are deductible if those amounts are not required to be capitalized under §1.263(a)-3, which states in part that any amounts paid for permanent improvements or betterments made to increase the value of such property must be capitalized. Under the proposed regulations these improvement standards are applied to the building itself and individually to its structural components such as heating and ventilation, plumbing, electrical, fire protection and security systems and escalators and elevators. Also the new regulations will allow the dispositions of component parts of a building resulting in the recognition of a gain or loss upon the retirement of such component.

[DANRVAN]

53 minutes ago, Abby Normal said:

Just replacing an existing system usually qualifies as a repair.

Looks to me like it falls under Sec. 1.263(a)-3(k))(1)(iv)   "Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use"

[DANRVAN]

28 minutes ago, Terry D EA said:

is the possibility of 20 year life for septic tanks. 

If you take the position that it is not part of a building system per Reg §1.263(a)-3 (e)(2)(ii)(B)(2), why would you use 20 years instead of 15?