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Hi,

We have a question regarding rental properties. We had to replace a furnace this year in a rental property. The furnace went out and the repair cost was about 65% of the replacement cost (circuit board, blower, etc). We opted to replace the furnace.

Our accountant thinks this should be written off as capital and we feel that it could be considered an expense because it was necessary and wasn't done to resell the home or anything like that.

Thanks for your input.
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Our accountant thinks this should be written off as capital and we feel that it could be considered an expense because it was necessary and wasn't done to resell the home or anything like that.


You need to read the publication about business expenses. Necessary or for resale have nothing to do with the type of the expense.

You don't get to decide whether something is an expense or a capital expenditure. It's described in the publications. A furnace replacement is a capital expenditure and must be depreciated. A furnace repair would be an expense that could be deducted from taxable income.

- Megan
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You don't get to decide whether something is an expense or a capital expenditure. It's described in the publications. A furnace replacement is a capital expenditure and must be depreciated. A furnace repair would be an expense that could be deducted from taxable income.

Actually, it's not that clear-cut. There have been a number of tax court decisions lately that support the position that a roof replacement can be a repair and not a capital expense. I would imagine the same argument could be used for a furnace replacement, namely that it keeps the rental property in usable status and doesn't improve the property over the state it was in before the roof (or furnace) failed.

You can find more information by searching the misc.taxes.moderated usegroup.

Ira
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