How To Depreciate Air Conditioning For Rental Properties – Getting an air conditioner for your rental unit can be an expensive purchase. As an intelligent landlord, you’ll want to subtract the cost of the AC unit from your rental income when it’s time to file your taxes.
The Internal Revenue Service thinks that an air conditioner should last longer than a year. They want you to claim a portion of the cost of the air conditioner on your taxes every year that it works. To do this, you will need to know certain things.
Air Conditioner For Rental Properties
Air Conditioning For Rental Properties: What is depreciation?
Depreciation is a way to spread out the cost of an item over the number of years it is expected to be helpful. It gives you a better idea of how your business is doing.
If you counted the total cost of the equipment in one year, you would have a significant expense the year you bought the kit but none in the years after that, even though the equipment is still making money.
Depreciation breaks up the cost so that expenses and income can be better tied together in a given reporting period.
Air Conditioning For Rental Properties: How do I keep a record of depreciation?
Generally accepted accounting principles (GAAP) let you record depreciation in one of three ways: straight-line depreciation, units of production/output, or one of two accelerated methods. In any of these GAAP methods, you need to know how much the asset costs and how much it is likely worth as scrap.
The difference between these two numbers is called the depreciable base. You will use this number to determine your depreciation expense for each accounting period. You will also need to know how long the asset is expected to last, either in years, hours of use, units of production, or some other way.
The journal entry will take money out of the Depreciation Expense account and put money into the Accumulated Depreciation account, a counter-account that lowers the value of the Property, Plant, and Equipment account.
How do I report the loss in value of an air conditioner on my tax return?
Form 4562 of the IRS is used to report depreciation. The IRS figures out how long different kinds of assets can be used. This is known as the class life of the purchase.
The time for getting your money back on Form 4562 comes from this decision. The recovery period for appliances used in rental properties, like air conditioners, is 5 years. You will need to know which convention you can use to show the date the asset was put into service for tax purposes.
If you bought more than 40% of the assets in the last quarter of the year, you would use the mid-quarter convention. If not, you will use the half-year convention.
Mid-quarter means that you will treat the asset as if it were put to use halfway through the quarter in which it was bought. Half-year means that you will think of the purchase as being put to use halfway through the year.
The depreciation method is the last thing you need to know about a piece of equipment to figure out its depreciation. The IRS Publication 527 says that the 200 per cent declining-balance method should be used to figure out the amortisation of an air conditioner or any other property with a 5-year class life.
Depending on the convention you must use, you must report a certain percentage of the depreciable basis as an expense each year or each quarter.
Refer to the MACRS GDS Percentage Tables in IRS Publication 527 for the best way to figure this out. You multiply the percentage given for that period by the asset’s total depreciable base.
