Depreciate Appliances in Rental Property for Tax Benefits

You can depreciate appliances in your rental property over a 5-year period, which can significantly reduce your taxable income.

The IRS allows you to depreciate appliances such as refrigerators, stoves, and dishwashers using the Modified Accelerated Cost Recovery System (MACRS).

Depreciating appliances can help you recoup some of the costs of purchasing new appliances, which can be a significant expense for rental property owners.

To depreciate appliances in your rental property, you'll need to understand the tax implications. The IRS sets certain criteria for property owners to meet, including having legal property ownership and generating income from the property.

To claim property depreciation, you must meet all the IRS criteria, which also includes being able to determine the property's useful lifespan. The land itself cannot depreciate, but the property itself can if it has a useful life of over one year.

If you meet these criteria, you can claim property depreciation on your taxes and reap the benefits. However, if you flip homes as part of your income, you likely won't be able to depreciate your property because most property flippers own the real estate for less than a year.

Tax Categories can be a bit confusing, but let's break it down. There are two main categories: Division 40 (Plant and Equipment) and Division 43 (Capital Works).

Eligible depreciation items, including appliances, typically fall into the Division 40 category. Your quantity surveyor will work out which items go where when inspecting your investment property.

Appliances always go into the plant and equipment schedule. This is a general rule of thumb.

Rental property owners can deduct about 3.6% of their property's cost basis from their yearly income as reflected on their tax returns.

This decrease in taxable income can make a huge difference come tax season. The Internal Revenue Service (IRS) sets the lifespan of a rental property at 27.5 years, which is a key factor in determining the rate of depreciation.

As a result, property owners can enjoy a significant decrease in their taxable income for 27.5 years, or as long as they own the property.

To qualify for property depreciation, you need to meet certain IRS requirements. The IRS sets the standard for depreciation at 27.5 years for rental properties.

To meet this standard, you must have legal property ownership. This is a straightforward requirement, but it's essential to ensure you have a clear title to the property.

Income generation from renting to tenants is also a must. This is typically the primary source of income for rental properties, and it's what justifies depreciation.

The property's useful lifespan is another crucial factor. You must be able to determine a lifespan of over one year for the property itself, excluding land. Land itself cannot depreciate.

To summarize the requirements, here are the key points:

If you meet all these criteria, you can claim property depreciation on your taxes and reap the benefits.

You own the asset, and it's used for an income-producing activity, to qualify for depreciation. This means you can deduct the cost of certain assets over time on your tax return.

To be eligible for depreciation, the asset must have a determinable useful life. This means it can decay, get used up, wear out, become outdated, or lose its value from natural causes.

You can depreciate assets that are expected to last for more than one year. However, if you place an asset in service and dispose of it in the same year, you may not be able to depreciate it.

Assets that meet these criteria include structures, furniture, appliances, improvements, sprinkler systems, and even some landscaping.

To depreciate appliances in rental property, you'll first need to identify the eligible assets. You can depreciate your asset if it meets all the following criteria: you own the asset, it's used for an income-producing activity, and it has a determinable useful life.

Some items on rental properties depreciate faster than others. Furniture, appliances, and carpeting tend to depreciate in value faster than the home they're used in, with a depreciation period of generally five years. Office equipment has a general depreciation period of seven years, and fences and roads depreciate over 15 years.

Here's a breakdown of the depreciation periods for some common rental property items:

Refrigerator depreciation is an important aspect of claiming deductions on your rental property. Refrigerators depreciate at 10% per annum in the Prime Cost schedule or double that (20%pa) in the Diminishing value schedule.

If your refrigerator costs less than $1,000, it's classified as a Low Value Pool schedule and depreciates at 18.75% per annum in the first financial year, then 37.5% per annum each year thereafter.

The Australian Taxation Office determines the effective life of an oven to be 12 years, which is the same as a refrigerator. Ovens costing more than $1,000 depreciate at 16.66% per annum, a rate that's lower than that of dishwashers.

You don't need to break the bank on expensive appliances for your investment property.

Generally, it's unlikely you'll get a better quality of tenant or higher rental income by paying extra for upmarket appliances.

Some upmarket locations, like New Farm, Bulimba, and Paddington, have high expectations for appliance quality due to their high weekly rent payments.

If you're choosing between a $900 oven and a $1,500 oven, the $900 oven is a better option because it depreciates faster.

You'll get 18.75% depreciation in the first year and 37.5% each year thereafter, compared to 16.66% every year.

It's also worth noting that many people don't even use their ovens, making it almost purely aesthetic.

You'd be better off buying another Air Conditioning unit for your tenants than a fancy oven.

Items like furniture, appliances, and carpeting tend to depreciate in value faster than the home they're used in, with a depreciation period of generally five years.

Office equipment has a slightly longer depreciation period, clocking in at seven years.

Fences and roads depreciate over a much longer period, taking 15 years to lose their value.

To depreciate appliances in your rental property, you must first determine which depreciation method to use. For assets placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System (MACRS).

Your asset's in-service date is a key factor in determining which method to use. If your asset was placed in service before 1987, see IRS Publication 534 for the applicable depreciation information.

To calculate depreciation, three key factors are involved: your basis in the property, the recovery period for the property, and the depreciation method used. We recommend working with a qualified tax accountant, but we'll cover the basic steps as an overview.

You can calculate MACRS depreciation using either the percentage from the MACRS percentage tables or the depreciation method and convention that apply over the recovery period of the property. For the complete percentage tables, see Appendix A of Publication 946.

After calculating your asset's depreciation, record it in your account books.

Appliances, carpeting, and furniture for residential rental properties are classified as 5-year property, along with computers, office machinery, and cars for businesses.

For example, if you're a landlord and you buy a new refrigerator for your rental property, it would fall into the 5-year property class, allowing you to depreciate it over a 5-year period.

Items like office furniture, such as desks and file cabinets, are classified as 7-year property.

If you're a business owner and you purchase office furniture, you can depreciate it over a 7-year period, taking into account its useful life.

Assets like fences, roads, driveways, or foundation shrubbery, which are improvements added to or made directly to land, fall into the 15-year property class.

Residential rental property is a separate class that covers buildings or structures, as well as structural components like furnaces, venting, and plumbing.

Here's a quick rundown of the GDS property classes commonly used for real estate: