How to depreciate appliances, carpets.
One of the most common items purchased for a rental property would have to be a new (or used) appliance of some sort - things like refrigerators, stoves, ovens, dishwashers, washer/dryers, etc. A close second in popularity for most rental property purchases would likely be new carpeting or window coverings.
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Unfortunately for rental property owners these and other types of personal property cannot be expensed in the year purchased nor are they eligible for section 179 accelerated depreciation. These examples do, however, fall under five year category depreciable items and are therefore depreciated over a five year period from the time placed in service in a rental property.
Just as the rental property itself has a 27.5 year depreciation life these newly added items have a (much shorter) depreciation life of their own. What can be a little confusing about appliance depreciation is that the conventions used are different than that used for the property as a whole and come with some caveats that need considered.
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For depreciation purposes, when a common appliance like a refrigerator is purchased or new carpets are installed the purchase is normally treated as if it were made mid-year no matter when the item was actually purchased. This is called "Half Year Convention" and there are IRS tables that can be used to determine each year's depreciation amount. For example, if you purchased a new stove in September the IRS will treat it as if it were really purchased on July 1. Ideally, if you purchase several items this should make it easier to calculate your depreciation amount. But, there's a catch.
If you purchase more than 40% of the dollar amount of total purchases for a property in the last quarter of the year (Oct, Nov, Dec) then you cannot use Half Year Convention and must instead use Mid Quarter Convention for that property's purchases. "Mid Quarter Convention" simply means that all purchases are grouped by quarter and then the mid-point of each quarter is used for your imaginary placed in service date. Luckily the IRS has tables for this as well but you have to do the additional step of grouping purchases by quarter. We also have a simple appliance depreciation calculator that can use for up to five purchases for your property in a given year.
Tax-wise it really isn't that big a deal to have to use one convention (half-year or mid-quarter) over the other. Examples can be given that show each convention giving a larger first year deduction. For most property owners it really boils down to reporting purchases correctly vs. trying to time purchases for tax advantage. To get a better feel of how to report appliance purchases see our appliance depreciation examples.
As an added note keep in mind that sales tax, delivery charges, and setup fees are included in your purchase price amount. In tax lingo they're part of the appliance's "basis" and are included in the dollar amount to use when figuring depreciation. Also note that used appliances are treated the same as new ones. Use the price you paid for the item as your beginning basis. If you purchased a new appliance for your own home and put your old one in your rental then your basis is the market value of the used appliance at the time you put it into your rental unit (not the value of the new one you bought for your home!). For more on depreciation see depreciation basics. -back to tutorial index-
