When a common appliance is purchased for a rental property the purchase is treated for depreciation purposes as if the appliance is bought and placed in service at the mid-point of the year (July 1), regardless of the actual purchase date. This is called "Half Year Convention" and there are IRS tables that can be used to determine each year's depreciation amount. Using the EasyRentalTools Appliance Calculator or Appendix A of IRS publication 946 (How To Depreciate Property), pages 70-73, the proper deduction for each year can be easily calculated. As an example, regardless of whether a new stove is purchased on September 12th or March 18th the purchase will actually be treated, tax wise, as if it were purchased half way thru the year (July 1st). This simplifies accounting for appliance purchases. Multiple purchases for the same property made on different days would also all be treated as if they were made on the same mid-year day, with some exceptions (next paragraph).
The exception to Half Year Convention’s "mid-year" approach takes effect if more than 40% of the dollar amount of total appliances purchased for a property is purchased in the last quarter of the year (Oct, Nov, Dec). If this is the case then the purchases are grouped by quarter and each group treated as "mid quarter" (Mid Quarter Convention) instead of the year’s total being treated as "mid year" (Half Year Convention). The IRS tables linked above will help with this as well although the additional step of grouping the purchases by quarter is required. EasyRentalTools’ Appliance Calculator will automatically do this for you for up to 5 purchases for your rental property in a given year.
A couple of additional pointers should be made:
* Used appliances purchased for a rental are treated the same as new ones. Both are depreciated over 5 years.
* If a new appliance is purchased for one’s home and the old one is placed in the rental then the amount used for depreciation is the value of the used one at the time it was placed in the rental property (not the price of the new one bought for the owner’s residence).
* Sales tax, delivery charges and setup fees are all included in the purchase price amount being depreciated.
* Purchases for rental property are not eligible for section 179 accelerated depreciation.
* * New appliances purchased in 2010 are eligible for 50% bonus depreciation. Note that to qualify for bonus depreciation the appliance(s) must be new, not used.
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.
All of this can be easily tracked using EasyRentalTools calendar approach to property management. Remember, at EasyRentalTools "You push the button – We do the work!"