I've explored the IRS Site and Pub 946 but have not found how to depreciate improvements made to my res. rental property. While improvements are generally depreciated over 27.5 years, what does it apply to? I mean, I can see an addition carrying 27.5 years, but what about improvements made within the existing structure?
For example, I've completely renovated the kitchen: new cabinets (which, if considered furniture, would carry a 5-year recovery period); new appliances (7 years); new flooring (7 years), etc. Would the entire kitchen be a category (and would it fit the 27.5 years "improvement" life?), or do I need to have a depreciation schedule for each individual improvement within the kitchen? And I haven't even mentioned all the "other" stuff that goes into renovating a kitchen such as permits, design, demolition, painting, etc.
For that matter, I also finished the basement: new drywall, carpeting, bathroom, new staircase, etc. Should this be broken into components, too?
Replacements of roof, rain gutters, windows, and furnace on a residential rental property are capital improvements to the structure because they materially add to the value of your property or substantially prolong its life. The items would be in the same class of property as the rental property to which they are attached. Since the property is residential rental property, the items are generally depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention.
New cabinets that are attached to the structure are not considered as furniture. Cabinets and structural components such as furnaces, water pipes, venting, drywall, bathroom, new staircase, etc. - are depreciated over 27.5 years.
Appliances that are not structural components, such as: Stoves, Refrigerators in rental property are depreciated over 5 years. Carpets are also depreciated over 5 years.
Please also see for reference IRS publication 527 - http://www.irs.gov/pub/irs-pdf/p527.pdf
Ok, thanks. So, it sounds like most of the improvements can be grouped together and depreciated over 27.5 years, correct? What about the design and permit costs; as well as would the gutting and hauling debris costs be part of the improvement costs?
If these improvement expenses are related to changing structural components - yes - they should be added together and depreciated over 27.5 years.
If some expenses are related to not-structural components (carpet, etc.) - should be added together and depreciated over the life of that component.
If some expenses are related to repair (painting, etc.) - should be added together deducted in the year paid.
If some expenses are related to several types of improvements/repair (design and permit costs, cleaning, hauling debris, etc.) - such expenses should be prorated to each type.