OK, thanks; I understand. I haven’t gone into this too much yet, but I assumed that the time value of money was factored into these depreciation schedules. Sounds like it isn’t. In some cases the IRS does factor this in however. For example, when I was calculating how to write off the points used for the mortgage I found that this was done by adding a fraction of the points each year to the base used to depreciate the property. The amount I would add increases each year by a factor equivalent to the %interest I am paying; therefore in this case there is no disadvantage paying over time.
I recently bought my first multi-unit rental property and I spent about $1K on tools; table saw, mitre saw, drills, shop vac, sanders, etc. I use these for both repairs and improvements. I would like to write off these items as business expense, but I am having a hard time finding specific tax information on how I should do this. I could see tools being written off either as an expense for that year or depreciated over several years. Can anyone tell me what is standard in this business, and what is the usual time period?
By the way, I inquired earlier about a tax guide specifically for investment properties and I found a good one I would recommend to others:
Crouch, Holmes F.
Rental Real Estate
pub: AllYear Tax Guides
ISBN# 0-944817-53-X
$15 - $20
less than $1,000 expense and greater than $1,000 depreciate/capitalize. I suggested that may not be approrpiate for some items. He told me to depreciate a paint job (for more than $1,000) over a 7 year period as well as wall to wall carpet over a 7 year period and appliances over a 5 year period. The appliance I can see, but as I told him anybody who has ever been a landlord would love to have some of that carpet and paint that’s guarenteed for SEVEN YEARS. The agent overruled me.
At my firm, and many others, we have a threshhold for expensing items and capitalizing them. At our firm that threshhold is $500. Anything that’s under that threshhold we expense, above it we capitalize and depreciate. We’ve had clients audited and told the auditor of our policy and never had it questioned, so apparently the IRS isn’t concerned with this sort of practice. What they are concerned with is expensing a $3,500 piece of equipment that should obviously be capitalized. Hope this helps.
Hand tools are assets. The good news is though that you can expense certain assets under the Section 179 provision of the tax code, rather than depreciate them over time. (Form 4562). I believe hand tools would fit this provision. Section 179 writeoffs are limited to $19K if I’m not mistaken. Check with your CPA.
My standard procedure is to “Not Own Any Tools” Why are you doing the work for this or any other rehab? Are you an investor or a carpenter? I make money buying and selling houses! Not fixing them!!! and so should you. We can all make more money with our minds instead of trying to do it with our hands! C’mon Mark get an investors brain and lose the lame brain that you posess now!
Hope this don’t hurt your feelings but it is a hard cold fact of REI
Just out of curiosity though, if you were to tell me this, why would expensing be better than depreciating? I know there is some financial rationale about a deduction up front being better than a deduction spread over time, but can someone explain why one is better than the other? (not only for hand tools, but in general)
While I agree that most investors should avoid doing major time-consuming repairs, I find it a necessity on rentals and other investment properties to do some repairs. Yes I could call a plumber and pay $94 to get them to fix the jiggly thing inside the toilet that causes it to run continuously, but it is much easier (and cheaper) for me to spend 15 minutes and $8 and do it myself (and then pass the first $30 of monthly repairs along to the tenant).
Each person has different reasons for buying real estate. You have your own reasons and they are your own. My question was how to handle taxes on hand tools.
Just so that you don’t get off on the wrong track, the hand tools are NOT expenses, and are not written off as such. Perhaps that’s why the above anonymous poster chose to be anonymous.
Hand tools are assets. They can be depreciated, or they can be written off under Section 179. This is going to end up looking similar to an expense, but it is accounted for on an entirely different tax form. There is no reason to have to do this incorrectly to achieve that same result that the tax law provides anyway.
An understanding of the time value of money would tell you why using Section 179 to write these assets off would be preferable to depreciating over time. $1000 written off today is worth more than $1000 written off over time.
I think you may have misunderstood. What I meant is that if a client spends $300 on a tool, we’ll put it into an expense account (i.e., Small Tools Expense). If they purchase an item that’s over $500, we put it on the balance sheet and depreciate it. If, at the end of the year thay have the income for it we’ll take the section 179 expense up to the maximum allowed. All those items that were under $500 are expensed in addition to what we take section 179 for. Hope this clarifies things.
