Section 179 on property placed in Residential Rental

Individual Client has a residential rental property and he put up kitchen cabinets for $5K. He has more rental income than that.

I input the cabinets as Sec 179 property but it was disallowed on 4562.

But when I put SL as the method of depreciation, the entire $5K appeared on Line 14 as special depreciation and he is able to deduct it.

Is it a special depreciation rather than Sec 179? Please help.

You should really educate yourself on depreciation methods and treatment. I feel it is a core part of what we do as professional preparers. If you're not up on these items, you're missing a lot of value you could bring to your clients.

Sec 179 isn't available for a rental activity. For purposes of that section, a rental activity is not a trade or business and you need trade or business income to take 179 expense.
Bonus depreciation is what your software is taking. This IS available for rental activities and may drive a loss for any given year.

CaptCook, you might want to retract your post. Rental activities may be trades or businesses under section 179 the same as under section 199A. Furthermore, the TCJA changed section 179 so that it removed the residential rental exclusion from that section. The issue here is whether the cabinets are section 1245 property or not. After working through the facts and circumstances under the Whiteco factors, the answer could come out either way. If they are section 1245 property and this rental activity is a trade or business, section 179 would be available subject to the usual limitations. The software is most likely defective, which is too often the case this year.

Thanks.

Now the question is that if the residential rental is a trade or business. The taxpayer is not a real estate professional or does she devout a lot of her time to run this rental property. She rented this one apartment to the same tenant for years and only remodeled it when the tenant moved out. Under this facts, I would say she may not be qualified under 199A. in that sense, Section 179 is not allowed. But can she still take the bonus depreciation?

Yeah, no problem on the bonus.

Yeah, no problem on the bonus.

Why no problem?

If the property is merely held for the production of income, bonus would be available (assuming the cabinets are section 1245 property). I hope that last bit was implicit.

In prior years, I would have thought that passive rental income should not be included as business income for the 179 business income limit. Now that 179 on rental assets is allowed, is all rental income business income, or only if the rental is 199A QBI income or is there some other more appropriate yardstick?

(assuming the cabinets are section 1245 property)

Why would that be implicit when in Post #3, you said:

The issue here is whether the cabinets are section 1245 property or not.

Doesn’t that have to be resolved before we say, “Yeah, no problem on the bonus”…?

Post #4. Be careful. Just because the person doesn't devote a lot of time doesn't mean it's not a T/B. The safe harbor rules are useless, so don't use those. There are some court cases out there that say that even 1 rental property might qualify. I've seen this discussed in another forum I am in. Good luck!

Hazard v. Comm 7 T.C. 372

Jeff,

I figure OP resolved it before moving on to bonus.

CaptCook, you might want to retract your post.

Admittedly, I think I worded it poorly, but I'm willing to stand by it for the moment.

Rental activities may be trades or businesses under section 179 the same as under section 199A. Furthermore, the TCJA changed section 179 so that it removed the residential rental exclusion from that section.

I went back and looked at my bill tracker history and can't find where there was a change in §179 to this effect. Could you point out where this section changed to "remove the residential rental exclusion".
I see where select nonresidential real property was explicitly included, but no reference to residential real property.

The flush language of section 179(d)(1).

What Flush Language?

(d) Definitions and special rules.--

(1) Section 179 property. --For purposes of this section, the term “section 179 property” means property--

(A)  which is--

(i)  tangible property (to which section 168 applies), or

(ii)  computer software (as defined in section 197(e)(3)(B) ) which is described in section 197(e)(3)(A)(i) and to which section 167 applies,

(B)  which is section 1245 property (as defined in section 1245(a)(3) ), and

(C)  which is acquired by purchase for use in the active conduct of a trade or business.

This flush language:

Such term shall not include any property described in section 50(b) (other than paragraph (2) thereof).

Foreign Assets?

No, paragraph (2) of section 50(b) is property used for lodging. Foreign assets is paragraph (1).

Do we digress? Isn't the question for OP is what is the class life of the cabinets? If they are required to be depreciated the same as the residential rental (27.5 years) then the cabinets would not be eligible for bonus depreciation because their recovery period is greater than 20 years. I would have thought the cabinets are considered permanent to the building and depreciated the same. There were some court cases on cost segregation where bathroom cabinets, vanities, and counters were Sec. 1250 property, not Sec. 1245. I would think kitchen cabinets would be the same.

Post #7.

If the property is merely held for the production of income, bonus would be available (assuming the cabinets are section 1245 property).

I would think 1250 property but you should be able to dispose of the old cabinets.

There are the six Whiteco factors to determine whether an asset is inherently permanent. Personally, I see it as an uphill battle for kitchen cabinets in a single family residential.


1. Is the property capable of being moved, and has it in fact been moved?

Yes and probably no.

2. Is the property designed or constructed to remain permanently in place?

Not really. They are usually easy to replace, though care must be taken with granite or marble countertops.

3. Are there circumstances which tend to show the expected or intended length of affixation, i.e., are there circumstances which show that the property may or will have to be moved?

Except for replacement, no.

4. How substantial a job is removal of the property and how time-consuming is it? Is it “readily removable”?


It is pretty easy, taking a handful of hours at most.

5. How much damage will the property sustain upon its removal?

Very little if handled with due care.

6. What is the manner of affixation of the property to the land?

Gravity, glue, and a few screws.

Nothing is insurmountable, but there is an overwhelming impression of permanence unless a taxpayer can show plans for future layout changes, e.g. going from a galley kitchen to an open concept.