As the new year begins, there is always much to be excited about. New chapters in life, new goals to accomplish, places to visit, and even future friends to make! However, with every passing year, there also comes a new tax year. Yes, that dreaded feeling in the back of your mind where you know the coming headache is right around the corner. Wrestling with tax law, making sure all your paperwork is in line – and most importantly, that you get as much back as possible is on everyone’s mind!
Tax season, in general, doesn’t have to be stressful, but for many, it is. If you have been curious about what bonus depreciation deductions are, this is a great year to find out. Bonus depreciation deductions is a powerful tool that real estate investor can use to help increase the amount that they can expense when it comes to any kind of property improvements. In fact, qualified property improvements can help to lower the taxable net income in very appreciable ways.
The good news is that if you are ever curious about how you can benefit from bonus depreciation, there are trained professionals who can help you. While this may be a new area of tax law you aren’t familiar with, it’s easy to get a basic overview, and you can find help to ensure you safely file your taxes to the best possible potential.
One aspect of bonus depreciation is that it can help to lower the taxable net income of a real estate investor based on such property as – kitchen appliances, cabinets, or any kind of repair. If you have been curious about claiming your new kitchen cabinets as bonus depreciation, here is a great overview to help you begin to understand the process!
What is Bonus Depreciation
First off -what exactly is bonus depreciation? Okay, so the most basic way to explain this is that bonus depreciation relays to cost segregation that can benefit real estate investors. To put it simply, when a piece of property sustains damage and needs to be repaired, certain aspects of that repair may be qualified improvement property that can claim bonus depreciation.
This could look like a number of things, such as a property that needs new kitchen cabinets, flooring, or appliances. Because these items have a shorter life of between 5-27.5 years, they may qualify for bonus depreciation that allows the investor to write off the total deduction in the initial year of their installation. This can help to improve and lower the net taxable income.
Kitchen cabinets could qualify as nonresidential real property with a lower depreciation period of fewer than 27.5 years. Because of this, they may qualify as bonus depreciation, and the entire expense of their installation could be claimed as a legal deduction.
The logic behind this is simple, these costs, if deducted, would allow the real estate investor to further improve the quality of their rental property. This creates a positive impact on the economy as better rental property/nonresidential property can increase property value in the local economy. This tax incentive will help to make it easier for real estate investors to make much-needed improvements that can not only improve local economies but the livelihoods of those who use these nonresidential properties.
Residential Rental Property and Bonus Depreciation
When it comes to the depreciation period in rental property, depreciation begins as soon as a property is put into use. From the time that the property is used, it acquires a depreciation of 3.636% over 27.5 years. For some properties, the depreciation period is much shorter, at five years or between 5 and 27.5. These segregated costs that are represented by the depreciation schedule, can qualify for bonus depreciation and, in certain cases, be deducted in their entirety the year of their installation.
Kitchen Cabinets and IRS
Section 179 of tax law is what is commonly used for qualified improvement property, such as kitchen cabinets. Kitchen cabinets are typically considered real property that is able to qualify for several reasons. Cabinets are a necessity, something that any rental property should provide, and usually have a higher purchase price.
For non-residential rental properties, section 179 can help make kitchen cabinets a qualified bonus depreciation, however, for a residential rental property, they need to be classified as a repair. This is typically the case for residential rentals, as over time, kitchen cabinets can easily acquire damage and need to be replaced.
Tangible Personal Property
One of the most important factors of whether something can be considered bonus depreciation is the rate at which it depreciates. While many depreciation rates are set on a 27.5-year scale, some properties depreciate over a much shorter span of time. For example, tangible property is a term used for personal property that has a depreciation rate of 5-7 years and is typically qualified for accelerated depreciation.
So what qualifies as tangible personal property? While a tax expert should always be the best way to define what is a tangible personal property item and what is not, in general – tangible personal property will be a property that can be moved without causing permanent damage. This qualifies for appliances, furniture, and much more.
When it comes to kitchen cabinets, there may be certain instances where the purchase of kitchen cabinets can be considered tangible personal property; however, this may not be the case generally. The reason is that the removal of kitchen cabinets themselves would cause some kind of permanent damage if not fixed, which would qualify as improvements. The good news is that kitchen cabinets are typically still eligible for bonus depreciation based on their faster depreciation rate.
Exceptions to Bonus Depreciation Eligibility
So now that we have a basic overview of what bonus depreciation is and how it can be a useful tool for helping real estate investors save money to reinvest into their properties, let’s look at what does not qualify as bonus depreciation. While a cost segregation study, conducted by professionals and interpreted by tax professionals, is always going to be the most accurate way to understand the tangible personal property and bonus depreciation, here are some guidelines.
While a piece of equipment that is owned may qualify as tangible personal property or even tax code 179, if it is leased, it typically cannot qualify. Now, this doesn’t mean that there aren’t strong benefits to leasing certain pieces of expensive equipment that an investor may not have long-term use for; however, if that investor is looking to qualify for equipment for bonus depreciation, typically leased equipment won’t qualify.
Another factor of bonus depreciation and being able to claim that on your tax year is the time frame that you purchased your kitchen cabinets. If you are afraid that your kitchen cabinets may not qualify for bonus depreciation, the best thing you can do is conduct a price segregation study and have trained professionals advise you appropriately.
How to Claim the Bonus Depreciation
So what is the best way to claim bonus depreciation on property that you have newly acquired or are looking to upgrade? Timeliness and professional help are the names of the game. There are a lot of savings to be had, from tangible property that can come under tax code 179 to bonus depreciation-eligible features like kitchen cabinets. However, the most important thing to do is ensure that you are making the most informed decision possible, and the best way to do that is to have trained, qualified tax professionals aid you.
Conclusion
The good news is that these tax codes and qualifications are designed to help promote the betterment of the community and local economies. Yes, it may be intimidating to grapple with at first; however, with the right help and a little work, finding ways to win meaningful savings through bonus depreciation is attainable!
