Depreciating tools and equipment used to make improvements

[ode923]

Hi all. This is a new one for me in my small practice:

Client is a carpenter/handyman by trade and as a side investment project he bought a property and renovated it and remodeled completely by himself, and then began renting it out. It's a residential rental.

Certainly the cost of all of the materials he used to improve the house are to be depreciated using the standard straight line 27.5 year method.

But what about the tools and equipment? To complete this job, he rented about $2,000 in tools/equipment and bought another $5,000 in tools/equipment. He wants me to depreciate it all.

The $2,000 in equipment he rented I am adding into the basis of the property. What about the $5,000 in equipment he bought? He started the project in summer 2017 and it was ready for rental by spring 2018.

The IRS rule on this is: Equipment used to build capital improvements. You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Pub. 946 and Pub. 551

My hunch is this will end up being a relatively small amount that will be added to the basis.

My reaction to the IRS rule is to take the equipment cost of $5,000, divide it by 27.5, and then pro-rate that amount based on the duration of time the equipment was used. For example, if the equipment was used for 6 months, I'll pro-rate it by dividing the amount by 2. Then, I will add that figure to the basis.

Still, a few things are driving me crazy about this:

1) Is 27.5 the correct depreciable life for equipment used in this context?
2) Not every tool was bought or used the same day. To keep myself sane, I'm going to group the tools by month of purchase.

Before I drive myself anymore crazy over this, perhaps someone more familiar with depreciating tools and equipment in this specific context can help. Thank you in advance.

[DANRVAN]

To simplify this response, assume the equipment had a five year life using straight line depr.  Also assume he bought the equipment at the start of the project which took one year to complete.   The "otherwise allowable depreciation" under that assumption would be $5,000 divide by five = $1,000 which is added to the basis of the rental property.  The $1,000 is lumped into the cost basis of the building which is depreciated out over 27.5 years once the building is place in service.

So in effect, the annual depreciation from the equipment will be $1,000 divided by 27.5 = $36.  The remaining basis in the equipment is $5,000 less $1,000 allocated to the building = $4,000.

3 hours ago, ode923 said:

 bought another $5,000 in tools/equipment. He wants me to depreciate it all.

He cannot directly depreciate any of it.  All he can do is allocate a portion to the rental basis.   Does he also use these tools and equipment in his carpenter work?  Maybe works as employee and lost out on misc itemized deduction?

$36 a year is not worth messing with.

[Lee B]

8 hours ago, DANRVAN said:

 

He cannot directly depreciate any of it.  All he can do is allocate a portion to the rental basis.   Does he also use these tools and equipment in his carpenter work?  Maybe works as employee and lost out on misc itemized deduction?

$36 a year is not worth messing with.

Aw shucks, you have taken all the fun out of this discussion.