How do you calculate the first-year depreciation deduction for a new air conditioner under MACRS in a residential rental property?
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To calculate the first-year depreciation deduction for a new air conditioner installed in a residential rental property under MACRS, you must determine:
- The property classification and recovery period
- The applicable depreciation method
- The convention to use
- The depreciable basis
- The correct first-year percentage
Let’s walk through each step in detail, referencing the relevant legal authorities and IRS guidance.
1. Property Classification and Recovery Period
Air conditioners in residential rental property are generally considered part of the building’s central heating and air conditioning system. Under MACRS, such systems are classified as part of the building’s structural components, and thus are depreciated as part of the residential rental property itself, not as separate personal property.
- Residential rental property is defined as a building or structure where 80% or more of the gross rental income is from dwelling units (see IRC §168(e)(2)(A);).
- Structural components (including central air conditioning systems) are depreciated as part of the building, not as separate 5- or 7-year property.
Recovery period:- Under the General Depreciation System (GDS), residential rental property is depreciated over 27.5 years.
2. Depreciation Method
- The straight line (SL) method is required for residential rental property under GDS.
3. Convention
- The mid-month convention applies to residential rental property. This means the property is treated as placed in service in the middle of the month it is actually placed in service.
4. Depreciable Basis
- The depreciable basis is the cost of the air conditioner (including installation), reduced by any Section 179 deduction or special depreciation allowance (bonus depreciation). However, Section 179 and bonus depreciation are not available for property that is a structural component of residential rental property (i.e., the air conditioner in this context).
5. First-Year Depreciation Calculation
a. Find the correct percentage
- For residential rental property, use the 27.5-year straight line, mid-month convention.
- The IRS provides a table of percentages for the first year, depending on the month the property (or improvement) is placed in service.
For example, if the air conditioner is placed in service in June, the first-year percentage is 1.970% of the depreciable basis.
b. Formula
First-year depreciation deduction = Depreciable basis × First-year percentage
c. Example Calculation
Suppose the air conditioner (including installation) cost $6,000 and was placed in service in June.
- First-year percentage for June: 1.970% (from IRS Table for 27.5-year property, mid-month convention)
- Calculation: $6,000 × 0.01970 = $118.20
6. Additional Considerations
- Additions or improvements to residential rental property (such as a new air conditioner) are treated as separate property items and depreciated over 27.5 years, starting in the month they are placed in service.
- Section 179 and bonus depreciation do not apply to residential rental property or its structural components.
- If the air conditioner is a window unit that is not a structural component, it may be considered 5-year property, but most central or built-in systems are structural components.
7. Summary Table of Steps
- Classify the air conditioner as a structural component of residential rental property (27.5-year property).
- Depreciate using straight line method.
- Apply the mid-month convention.
- Use the cost (basis) of the air conditioner as the depreciable basis.
- Multiply the basis by the first-year percentage from the IRS table for the month placed in service.
8. Conclusion
To calculate the first-year MACRS depreciation deduction for a new air conditioner in a residential rental property:
- Determine the depreciable basis (cost).
- Use the 27.5-year straight line method with the mid-month convention.
- Apply the first-year percentage from the IRS table for the month placed in service.
- Multiply the basis by this percentage to get the first-year deduction.
For a $6,000 air conditioner placed in service in June, the first-year deduction would be $6,000 × 1.970% = $118.20.
If you have a different month or cost, substitute those values and use the corresponding percentage from the IRS table.
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