Chattel Appraisal Depreciation

[greekfire]

Surveyor had made a post on a different topic about chattel appraisal deductions, so I decided to do some quick research on it and open up the floor for more discussion.

This is one of the links that I came across: http://www.chattelservice.com/pag_cms_id_3_p_faq-frecvently-asked-questions.html

In a nutshell, chattel pertains to those items that a landlord owns but aren’t actual real estate property, such as refrigerators, water heaters, etc. These items can be cataloged (serial # and description), appraised, and depreciated at an accelerated rate, which translates into additional tax savings for the landlords.

This is all I have for now. Anyone else have more insight on this?

[Bugs]

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.

[surveyor]

still more research to do

I still have more research to do into it, but some of the things I’ve learned so far:

1. This depreciation also includes items such as carpet, hardwood floors, and other things that usually have to be replaced during the lifetime of the property.

2. The depreciation can be accelerated, allowing you to get 52% of the tax benefit within the first two years.

3. Chattel depreciation usually runs about 10% of the worth of the property.

I have to talk to one of my group, who is the person who is setting up a company that will refer you to chattel appraisers nationwide. From what he has said, it costs around $600. Probably not worth it if you have only one small worth SFR, but if you have a lot of properties, that 10% that you can depreciate can add up. It’s an interesting concept.

[Bugs]

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?

[(former)FormerSanDiegan]

This is pretty simple, IRS pub 527 (http://www.irs.gov/publications/p527/ar02.html#d0e2480) provides a table for determining what items in your rental may be depreciated and over what period (see table below). Simply estimate the actual value of these items when you place the rental in service instead of paying someone several hundred to a thousand bucks for a Chattel appraisal.

It’s not rocket science.

A large landlord might have someone appraise these items, but my guess is that most simply evaluate a few types of their units and count how many A/C units dishwashers, etc they have in their buildings and do some multiplication. These items are also constantly being replaced. Once you replace (as many large landlords do constantly) the basis is what you paid, so no appraisal is needed in those cases.

IMO the market for selling these appraisals is to large property owners (who likely have the skills and manpower to do their own appraisal) and newbie landlords who don’t yet know the rules.

[img_assist|nid=3195|title=IRS pub 527- table 3. Rental property depreciation|desc=|link=node|align=left|width=268|height=500]

[Anonymous]

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

[murray]

What if a rental property has been in use for a number of years without a chattel / personal property deduction structure in place?
Does the structure have to be set up when the property is first put in service or can it be “started” anytime?
On tax form is it documented the same way as capital improvements?
Judging from previous comments it appears owner can set it up themselves without need for a formal appraisal. (?)

[Anonymous]

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

[Bugs]

And who is an appraiser working in compliance with the Uniform Standards of Professional Appraisal Practice.

[murray]

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

[Anonymous]

http://www.irs.gov/pub/irs-pdf/p946.pdf

This is the link to what the IRS publishes.

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

[murray]

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!

[Anonymous]

If only the IRS made it that easy. The list is scattered amongst several Revenue Rulings and the Audit Technique Guide.

The company we have contracted with to prepare our cost segregation studies has a proprietary list we use. Our costing company is extremely well regarded by the IRS.

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

[Anonymous]

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

[Anonymous]

OK, several parts to deal with, let’s hit them 1 at a time.

1. When you buy a property, the value of these chattel items is not on any HUD statement. Using a Chattel Appraisal puts legal values to these items for the acceleration. This will save hundreds or thousands per year by using 5 to 15 year, instead of the slower 27.5 or 39 year. Another way a Chattel Appraisal works is if you plan to replace these items shortly after purchase. Using a Chattel Appraisal puts values to these items prior to replacement. Then, another is done after replacement. You than use both values, the thrown out items are fully devalued, then the acceleration begins on the replacement items. Or, you could expense the replacement items(check with your tax adviser)

2. If you have owned the property for a while, and then relace an item, you have different choices on how to deal with it. I have seen some expensed and others “improved”. I worked with my tax adviser on my properties.

3. Now to recapture. You already pay recapture using the straightline 27.5 or 39 years. The great thing about recapture is you are taxed at your income tax rate, not the capital gains rate, and is capped at 25%. So if you are in a 15% tax bracket, the recapture is at 15%, if you are in a 35% tax bracket, the recapture is at 25%.

Let’s look at an example. Suppose you used accelerated depreciaition for 5 years and took $35,000 in depreciation. In a 35% tax bracket, this saves you $12,250 (35,000 x 35%) in tax dollars. Now you sell this property and have to recapture this $35,000. You are capped at 25% so the recapture tax is $8,750 (35,000 x 25%). You have kept $3,500 the difference between the 2 amounts.

Now, 2 other things, or factors, come into play that I see our clients deal with. First, if you use the 1031 Exchange, this strategy works extremely well. We perform many appraisals for those intending to 1031.

Second, the time value of money. Basically, $100 buys more today than in the future. You see it every day: gas prices, milk prices, home prices, all higher today than 5 years ago. If you had the $12,250 from above, could you find investments that create a better return than letting the IRS hang on to it? You can put it into more properties and create more cash flow.

4. Last, after the 5 or 15 year period, then you replace. It is the same as our discussion of expense vs improve.

We offer Free 15 minute reviews of your specific situation. Feel free to call or e-mail. Also, check out our website. We have a great deal more in depth info there.

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

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