I know that when I appraise a property in a market where built in cabinets, appliances, flooring and light fixtures are typical and the house doesn’t have them I make a substantial cost-to-cure adjustment. For appraisal purposes, the dividing line between real property and personal property is the manner of affixation. If you have to glue, nail and cement in finishes, it causes damage and a hole when you remove them.

It’s a tax dodge, and I’ll leave it to the tax experts as to whether or not the tax code legitimately allows it. But those items are definitely not considered personal property in the market. Having said that, I know the tax code does allow writing off the actual costs of repairs and replacements of those short-lived items, so it’s not as if a property owner is being forced to take an actual loss if they claim it as realty rather than personal property. It seems to me that doing both would be double dipping.

Carpeting and resilient flooring have an economic lifespan of about 5 years, sometimes less under heavy use. Water heaters and dishwashers are good for about 5 years. Cabinets and plumbing fixtures are good for about 15 years, sometimes more. A heater is good for 15 years.

I don’t know how long the IRS thinks these items last. Depreciating a 5-year lifespan by 52% in the first couple years might be okay because it would normally depreciate about that fast anyway.

You’d still have to deal with the IRS’s interpretation of what is personal property, though. Most people would agree that a Persian rug that can be picked up in 10 seconds is personal property whereas the wall-wall carpeting and tile that has to be installed by a craftsman is not personal property. Speaking of which, installation costs are a large part of it, and personal property wouldn’t legitimately include those costs. As I said before, I’m not sure how calling those items personal property would be a benefit unless there’s some double dipping going on.

While we’re at it, personal property would have a resale value. Relative to when it’s installed new, what’s the value of used tile flooring or cabinetry? It’s a lot less than what they add to the value of the realty, I can guarantee that.

Putting your money through offshore banking accounts is all fine too, until the IRS figures out what you’re doing, and then it becomes a lot more trouble than its worth. More than one tax program has proven to be problematic, and it looks like these guys are selling something. You definitely want to know before you go.

Their fees are a bit suspect, too. An appraisal on the realty would only average $350, why is it more expensive to appraise the finishes the house would normally come with?

The IRS has identified 65 items within a rental property that can be classified as Chattel, or Personal Property. This is the same tool used by commercial property owners.

What a Chattel Appraisal does is puts a dollar value to each and every item, which in turn would be used on your taxes for accelerated depreciation. The value of the Chattel and the value of the land are removed from the purchase price. You will now have 3 values: land, personal property and building.

The building value is depreciated over 27.5 years, the personal property is depreciated over 5, 7 or 15 years(depending on the item) and the land is not depreciated.

Chattel includes: flooring, cabinets, counter tops, lighting, appliances, even landscaping, walkways and pools. The list goes on. Chattel is considered for IRS purposes to be items a tenant wears out and a landlord replaces. You will see that not all Chattel has to be replaced, still, the IRS lets you accelerate the depreciation on these items.

John Racine
Chattel With Us, LLC

There is a time/cost factor you have to look at before determining if you can utilize this strategy.

The earlier on the appraisal is done, the better off you will be. It also depends on the type of property, how many units, how many tax returns have been filed etc.

Could you do it yourself? Absolutely! But, would you want to? Where could you get the values for your chattel? Do you know what is 5 year property, 7 year property, and 15 year property?

To give you an example, I had someone who did their own appraisal. They thought there was more value in their personal property. They had us go in and do a professional appraisal for them. We found $45,862.17 more than they did on their own! That equates to thousands in tax savings they would have missed.

You, as an investor, have to consider if you want to tackle it yourself. When it comes to the IRS, I personally, would not want to have to justify the values I came up with.

Obviously, I run a company that offers this service. You can use me, someone similar to me, do it yourself, or not do it all. If you are an intelligent investor and decide to chattel, what should you look for?

Look for someone who uses IRS approved values, not values obtained from a local Home Improvement store. Look for someone who will prepare accurate Cost Segregation Studies for you and your CPA. Look for someone who has expert knowledge of the 65 items the IRS calls Chattel. Ideally, look for someone, who themselves, is an investor.

John Racine
Chattel With Us, LLC
http://www.chattelwithus.com

Which IRS publication lists all 65 items in addition to items listed in Pub 527, Table 3?

John:

I’ll look thru doc tonight before bed 🙂
But in the meantime could you identify the table, paragraph or text which SPECIFICALLY lists all 65 items you mentioned?

Tnx!

Does this form of depreciation have to be recaptured upon eventual sale of the property?

Most landlords write off 100% of the actual cost of replacing items such as carpet, appliances, water heaters, etc. in the year the expense occurs (whether IRS allows it or not, this is how most landlords treat expenses).

How is the chattle depreciation method better than 100% write off as the expenses occur?

If you depreciate something over 5 years, then it’s replaced in the 6th year, how is the replacement expense treated? Does a new 5 years start?

Steve

Steve