Can You Depreciate a Furnace?

Depreciation means writing off the cost of purchasing new long-term use items over the course of the item's useful life, rather than a one-time expense taken in the year of purchase. You can write off annual depreciation costs against rental earned. The original furnace will be part of the building depreciation, but a new furnace starts depreciating the year purchased, and you write off a portion of the cost over 27.5 years, according to IRS charts.

If you own residential rental property, use Form 1040 and Schedule E to record income and expenses. Form 4562 is where you'll calculate the depreciation and carry it over to Schedule E. Then you'll carry over your profit or loss on Schedule E to Form 1040.

Form 4562 looks daunting, but it's not impossible to do yourself. The main building will be listed as Property 1 and the new furnace will be listed in Part III and depreciated separately. IRS Publication 527 (Residential Rental Property) has all the tables to calculate depreciation, but you'll have an easier job with tax preparation software, or use a tax professional.

Don't despair if you can't write off a new furnace, because you still get a tax break when you sell the property. A new furnace is an "improvement," which means you add the cost of the furnace -- including labor -- to the purchase price of your home. When it comes time to sell, the cost of the improvements lower your profit -- capital gains -- so you'll pay less in taxes. In essence, you're getting a full deduction for the furnace in the year you sell, rather than the 27.5 years it takes for owners of residential rental property.

Originally part of the American Reinvestment and Recovery Act, residential tax credits for energy efficient or solar heating systems expired in 2011. Homeowners could deduct up to 30 percent of the cost of energy-efficient improvements right off their tax bills. However, Congress may re-enact that portion of the stimulus package, so make sure the equipment would have qualified for the original credit. The contractor can verify eligibility. At the bare minimum, you'll save even more every month on your energy bills.

If you and your significant other own property together, you'll each claim a portion of the income and expenses on your individual tax returns, whether it's a primary residence or residential rental property. The amount each of you can claim is based on the ownership percentage. If you own 70 percent of the property and your partner 30 percent, prorate the deductions, depreciation or credit based on that ownership split.