Should I take depreciation for asset, or enter as expense - had rental home for over 27.5 years

Question

There's a rental home in my name, and it's been rented for over 27.5 years; depreciation on the home has been fully completed. However, we occasionally have an asset, such as a water heater for 2024.

-Should I put that down as an expense, or take depreciation for that?

-If I enter it as an expense, where should I enter it - as a repair, etc.?

-What does the last page of Schedule E mean when I take depreciation for the home or asset? Can you explain the numbers/columns?

GeorgeM · Answer

Hello Jules:

Yes, you can expense the entire cost of your $1,500 water heater using the de minimus safe harbor election.  The de minimus safe harbor election allows you to expense tangible property, such as a water heater, up to $2,500 per item per invoice.  If you had an applicable financial statement, the de minimus safe harbor election allows a full cost expense deduction up to $5,000 per item per invoice.

To take advantage of the de minimus safe harbor election for your water heater, follow these steps:

1. Select the Income tab.

2. In the drop down window, select Rental Property (Schedule E).

3. Select Edit, across from your Rental Property entry.

4. On the next screen, select Edit or Start across from Expenses.

5. Scroll down the screen to the De Minimus Safe Harbor election and select Yes.

6. Enter the water heater information as a Miscellaneous Rental Expense.

The above steps are all you need to do to enter your water heater information and expense the entire cost using the de minimus safe harbor election.

Whether to expense the full cost of the water heater or depreciate it over its applicable life (7 years) is a decision that’s best made by the taxpayer.  Arguably, expensing the entire cost of the water heater may give you a better tax outcome this year rather than depreciating the asset over its useful life.

While expensing the full cost in one year leaves nothing to write off in subsequent years, given the cost of the water heater, and the number of years it will take to recover its entire cost, depreciating the water heater may likely result in rather small deductions each year.

Thus, it’s best for you to compare both tax options—de minimus safe harbor and depreciation—and select the one that gives you the best tax outcome.

jules · Answer

Can anyone comment on using  de minimis safe harbor for this? I see online that we can use Safe Harbor if it's under $2500, and my water heater is $1500. Is this better than taking depreciating on an asset? Where do you enter this in FreeTaxUSA?

knittingfun · Answer

Here's what I found in the help icon by Schedule E income

"Repairs

Enter any amounts paid for repairs and maintenance that keep the property in an ordinarily efficient operating condition. For example, fixing a broken lock or painting a room.

Repairs and maintenance don't include improvements made to the property such as restoration or adapting the property to a new or different use. For example, repairing an existing furnace would be considered a repair. However, replacing an entire HVAC system would be an improvement."

It sounds like if you already had a water heater, and that's considered keeping the rental in operating condition, it would be a repair which could be considered an expense.

Hope this helps! I'm not sure about the columns.