Appliance Depreciation Examples.
As described in How to depreciate appliances figuring the correct depreciation amounts for your rental property purchases can be tricky. In addition to "Mid Quarter" vs. "Half Year" conventions we also have different ways we can calculate our depreciation amounts. The most common, by far, and the one we'll use here, is "double declining balance". This method gives us the most deduction in the first years and less in the latter years. 99% of the time this is what you'll likely use. If you feel you want to spread out the deductions more evenly over the coming years please see IRS publication 527 and/or talk with your tax professional.
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Example 1 - Bob owns a rental house and decides to purchase a washer/dryer combo for this rental unit. Bob purchases a stacked washer/dryer combo in May, 2007 and has the appliances delivered and set up immediately. Purchase price of the appliances comes to $1000, sales tax $60, and delivery/setup $50. Bob's total "basis" for depreciation purposes is then $1110 ($1000 + $60 + $50). This is the amount that will be depreciated. According to IRS Publication 527 appliances are depreciated over five years. Since this is Bob's only purchase for that rental property this year and he did not make the purchase in the 4th quarter (Oct, Nov, Dec) he'll use the Half Year Convention for these appliances. His depreciation amounts will look like this:
- 2007 - $222 (2007 tax year filed April 15, 2008)
- 2008 - $355
- 2009 - $213
- 2010 - $128
- 2011 - $128
- 2012 - $64
- Total - $1110
Note - Even though Bob bought the appliances in May the purchase is treated as if it happened "mid year" or July 1 - thus the term "Half Year Convention".
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Example 2 - Bob buys the stacked washer/dryer as above but also purchases a used refrigerator in October for $500 and sets it up himself. His total purchases for the year, then, are $1610 ($1110(above) + $500) for that rental property. $500 of the purchases were bought in the last quarter of the year (October). This equals 31% of the total for the year ($500 / $1610 = 31%). Since this is less than 40% Bob will still use Half Year Convention and both purchases will be treated as if they took place on July 1. Bob's depreciation schedule now looks like this:
- Item - W/D Fridge Total
- 2007 - $222 $100 $322
- 2008 - $355 $160 $515
- 2009 - $213 $96 $309
- 2010 - $128 $58 $186
- 2011 - $128 $58 $186
- 2012 - $64 $28 $92
- Total - $1610
Example 3 - Bob buys both the washer/dryer and the refrigerator as above. December comes and the stove quits. Bob buys a new range for $580 plus $35 tax and $50 delivery/setup (total $665). Bob's total purchases for the year now come to $2275 of which $1165 ($500 fridge + $665 range) were purchased in the fourth quarter (fridge in Oct, range in Dec). Since $1165 is more than 40% of the year's total of $2275 ($1165 / $2275 = 51%) Bob can no longer us Half Year Convention and must now use Mid Quarter Convention for purchases made for that property during that year. Mid Quarter Convention treats purchases as if they were made at the mid point of the quarter actually purchased instead of mid year. Bob's depreciation now looks like this:
- Item - W/D Fridge Range Total
- 2007 - $278 $25 $33 $336
- 2008 - $333 $190 $253 $776
- 2009 - $200 $114 $152 $466
- 2010 - $126 $68 $91 $285
- 2011 - $126 $55 $73 $254
- 2012 - $47 $48 $63 $158
- Total - $2275
Note - Why is the washer/dryer and the refrigerator amounts different in this example? By using mid-quarter instead of half-year the washer/dryer, being purchased in May, is treated as if bought mid-way thru the 2nd quarter (Apr, May, June). This gives it a greater first year depreciation amount than if it were treated as mid-year (July 1). The refrigerator (as well as the new range) is treated as if purchased mid-way thru the 4th quarter (Oct, Nov, Dec) so it gets less first year depreciation than if it were computed "mid-year". It should be noted that the totals remain the same over the 5 year periods. For larger purchases perhaps these differences should be considered in your planning. Mostly you just need to account for things correctly when figuring your taxes. Most tax planning and tax return software will do this for you. -back to tutorial index-
Irvin Wilson is a licensed real estate broker located in sunny Scottsdale, Arizona, home to over 125 professional art galleries and studios as well as approximately 2 million square feet of air conditioned shopping at Fashion Square Mall. Irvin specializes in income producing and vacation oriented properties. He can be reached by email at iwilson@realmarketexperts.com or by telephone at 1-480-850-1504.
Disclaimer -- Irvin Wilson is not an attorney nor a CPA. Legal and tax information is not legal or accounting advice.
