When you own rental property, your best tax deduction is usually depreciation. This permits you to deduct the cost of your rental buildings (not including land) a portion at a time over several years. Unfortunately, depreciation for residential rental property is particularly slow: the depreciation period for residential rentals is 27.5 years. In other words, you'll have to wait 27.5 years to deduct the full cost of your rental buildings.
Wouldn't it be great if you could speed up your depreciation deductions? Well, you can deduct the cost of some of the property you use in your residential rental business much more quickly than 27.5 years. In fact, you may be able to deduct the cost in a single year using a provision of the tax law called Section 179.
Under Section 179, business owners can deduct the entire cost of long-term personal property that they use in their business, rather than having to depreciate the cost over several years. This is called first-year expensing or Section 179 expensing.
A business can use Section 179 to deduct tangible, long-term personal property. In the past, Section 179 could not be used to deduct personal property used in residential rental property. However, the Tax Cuts and Jobs Act eliminated this restriction starting in 2018. This means that landlords can now use Section 179 to deduct the cost of personal property items they purchase for use inside rental units—for example, kitchen appliances, carpets, drapes, or blinds. For example, if you spend $3,000 for a new stove and refrigerator for a rental unit, you may deduct the entire amount that year with Section 179.
You can also use Section 179 to deduct property not located inside your rental buildings. This can include:
For example, if you spend $1,000 for office furniture for the office you use in your rental business, you may deduct the entire amount in a single year using Section 179.
However, you can’t use Section 179 to deduct the cost of:
Section 179 can only be used if your rental activities qualify as a business for tax purposes. You can’t use it if your rental activity is an investment, not a business. Owning rental property qualifies as a business if you do it to earn a profit and work at it regularly, systematically, and continuously—either by yourself or with the help of a manager, agent, or others. Rental ownership, on the other hand, is an investment, not a business, if you do it to earn a profit but don’t work at it regularly, systematically, and continuously. There is no set number of rental units you must own to qualify as a business. The courts have held that ownership of a single rental unit can be a business.
Section 179 expensing may be used only for used or new property that you purchase for cash during that year (cash includes amounts you borrow). It may not be used for leased property or property you inherit or are given. Nor may it be used for property you buy from a relative, or from a corporation or other organization you control.
If you use property both for business and personal purposes, you may deduct it under Section 179 only if you use it for business purposes more than half of the time. Reduce the amount of your deduction by the percentage of personal use. You’ll need to keep records showing your business use of such property. If you use an item for business less than half the time, you must depreciate it.
You can’t use Section 179 to deduct more in one year than your net taxable business income for the year (not counting the Section 179 deduction, but including your spouse’s salary and business income). Undeductible amounts are carried forward to be deducted in future years. Thus, Section 179 may never result in a loss. If you are prevented from using Section 179 because you don't have enough income, you can usually deduct the same property using bonus depreciation, which is not subject to an income requirement.
Starting in 2018, there is a $1 million limit on the total amount of business property expenses you can deduct each year using Section 179. This dollar limit applies to all your businesses together, not to each business you own and run. You do not have to claim the full amount. It’s up to you to decide how much of the cost of property you want to deduct. But you don’t lose out on the remainder; you can depreciate any cost you do not deduct under Section 179.
If you purchase more than one item of Section 179 property during the year, you can divide the deduction among all the items in any way, as long as the total deduction is not more than the Section 179 limit. It’s usually best to apply Section 179 to property that has the longest useful life and therefore the longest depreciation period. This reduces the total time you have to wait to get your deductions.
When you deduct an asset under Section 179, you must continue to use it for business at least 50% of the time for as many years as it would have been depreciated. For example, if you use Section 179 for a computer, you must use it for business at least 50% of the time for five years, because computers have a five-year depreciation period.
If you don’t meet these rules, you’ll have to report as income part of the deduction you took under Section 179 in the prior year. This is called recapture--something you want to avoid.