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Military Landlording 401: Partial Dispositions Thumbnail

Military Landlording 401: Partial Dispositions

Investment Taxes Managing Your Finances

If you're a military landlord, you know, hopefully, that you need to depreciate your residential real estate. If you don't, review this article. That is all well and good until you have to replace a broken part of your house. How would that work?

How Do I Handle My Taxes When I Replace a Capital Asset in My Rental?

Let's say you need to replace the HVAC in your rental. You might initially think it is a repair but since it extends the life of the structure, it needs to be capitalized over the property's life. Since the HVAC is an integral part of the structure, it has the same depreciation schedule as the structure. 27.5 years. Simple enough, you enter the new date of the installation and start depreciating the new HVAC for the next 27.5 years.

But what about the old HVAC? You've been depreciating it at 3.6% per year and if it hasn't been in operation for 27.5 years (like that ever happens), it still has some value. And now...that value is gone. That means you can expense the remaining value of old HVAC system in the current year.

How Do I Calculate the Value Remaining on a Capital Asset in My Rental?

This gets a little tricky. The guidance isn't really clear other than your method has to be defensible. You'll need to start with the value, when installed, of the old HVAC. Unless you did a cost segregation before you rented the house (it is doubtful that you did, and it's probably not worth it), you'll have to figure it out. Here is one method, you may want to consider:

  • Start with value of the replacement HVAC unit (or other capital asset)
  • Deflate it, using actual inflation rates, back to the date of the installation of the old HVAC system
  • Now calculate the depreciation for the unit from the date it was put into use in the rental (may be different than the installation date) based on the deflated value.
  • Reduce the value of the structure by the calculated value of the old HVAC on the date the property/asset went into service
  • Reduce the prior depreciation on the structure by the depreciation you calculated on the HVAC
  • Enter a new item in your depreciation schedule for the old HVAC
  • Put the date it was placed in service, the value of the HVAC and the accumulated depreciation on the unit
  • Take the old HVAC out of service on the date the new HVAC was placed in service (you may need to treat this as a $0 sale to get the deduction of the remaining value)
  • Start a new depreciation schedule for the new HVAC

Easy, right? I'm thinking TurboTax will likely have a problem with this one, and if you don't ask for it, I doubt the big-name tax preparation companies (the ones with the Super Bowl commercials) will do it for you either. I'll admit this is geeky, but if you put in a $9,000 HVAC system 10 years ago and have to replace it, you've giving up around a $6,000 deduction, if you don't do it.

Insurance Changes Things

Let's say you're replacing your roof due to a hailstorm. The same concept applies. But...you're not receiving $0 when you remove the old roof. You're receiving something and any loss you could claim would be reduced by those insurance proceeds or said another way; you probably only increase the basis of the house by the deductible you paid and assign that to the new roof.

Military Finances are Different

I think military members tend to be landlords more often than our civilian counterparts. Might have something to do with moving every 3 years. That is not the only way your financial life is different than a civilian's. That is why recommend that Active and Retired Senior Military Officers and NCOs work with a financial advisor or planner that deals with your unique circumstances each and every day. If you'd like to find out how we work with clients just like you, use the button below to schedule a free, initial consultation.

If you found this article useful, you might like the following blog posts:

So, You Want to Be a Military Landlord


Military Finances 401: Delaware Statutory Trusts. Another Choice for Rental Property Sales.


Retired Military Finances 201: 1031 Exchanges


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