Q. What is Chattel?

According to the IRS, chattel refers to tangible, movable personal property: Examples of chattel include: counter tops, cabinets, curtains, light fixtures, ceiling fans, flooring, water heater, fencing, sprinkler system, etc. Be aware that the IRS does not use the common definition of “personal property,” which is otherwise shared and understood by the real estate industry. In CPA terms, you may also hear chattel identified by calling it 1245 property (i.e., personal property). This is as differentiated from 1250 property (also known as real property).

Q. What are the benefits to the real estate investor?

Increased Cash Flow to the Investor

Because depreciation deductions on investment properties can more than double during the first three years, having a chattel appraisal can increase a property’s cash flow. For instance, with $1000 in tax savings, about $80 a month would be added to the net cash flow of a property.

Net Tax Reduction

A chattel appraisal can significantly reduce taxable income now and capital gains in the future. Just $15,000 worth of chattel can save more than $750-$900 off taxes in the first year alone. The average value of personal property found in a 1500 square foot house is approximately $15,000. Depending on the income tax bracket, that could be a savings of $3750-$4500 off of taxable income over the next 5 years.

That translates to an average yearly savings of $750-$900. The personal property appraisal has more than paid for itself, and has an additional four years of depreciation to utilize.

 Instant Inventory
A chattel appraisal contains detailed information about the contents both inside and outside the house, and acts as independent verification of the property and its value. This appraisal constitutes a written and visual description of all the personal property. Having this information at hand in the event of an insurance loss can prove invaluable.

Visual Record & Independent, Objective Documentation

The pictures that the appraiser takes serve as a visual record of how the rental property looked on a certain day. This can be beneficial if tenants leave the property looking badly. The pictures also help with insurance companies in the event of a disaster.

Q. How do you know if something is chattel or not?

You should know that the real test for “what is chattel?” has evolved through the last decade or so. In the beginning, the IRS specifically look at ‘functionality’ factors--that is, whether the room would still essentially function if the property were to be removed.

But, as accelerated depreciation is based in case law, the question of “what is chattel?” has not changed, but has grown to incorporate the consideration of permanency as well. If you want to do some tedious technical reading on the subject, you can search the IRS website for the Audit Technique Guide (ATG). The ATG has a tremendously boring but very informative few paragraphs on how they have historically shifted their focus from the functional use test to the evaluation of inherent permanency. (Search the ATG for “Functional use test,” or “Whiteco Factors”).

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Q. Why should I have a chattel appraisal on my investment property?

Because depreciation deductions on an investments properties can triple during the first three years, having a chattel appraisal can turn a negative cash flow property into a positive cash flow property. A chattel appraisal can significantly reduce taxable income now and lower capital gains in the future.

Additionally, a chattel appraisal contains detailed information about the contents both inside and outside the house and acts as independent verification of property and its value. Also, having this information at hand in the unlikely event of an insurance loss can prove invaluable.

Q. Who directly benefits from a chattel appraisal?

Real estate investors who own any size residential income-producing property are those that will benefit from the accelerated depreciation that a chattel appraisal brings. There is a whole community of people connected to the real estate industry who could use the chattel appraisals as a value-add service to their own business--people like real estate agents and CPAs among other people.

Q. Specifically, what kind of investor will benefit most from this service?

This tax strategy is ideal for investors who intend a long-term hold on a property, rather than for investors who like to fix and flip properties. Although it has been discussed by a few fix-and-flippers that taking accelerated depreciation could be viewed as a 0% loan from the IRS. Since the IRS 'recaptures' at your tax rate (but only up to 25% if your CPA manages it deftly) it has been argued that this could still be a workable strategy.

Another kind of investor that will benefit fromt his service is one that would like to accumulate passive losses. Investors can immediately use depreciation to cause a decrease in net taxes; especially high income-earners (making more than $150,000) can "save" the depreciation indefinitely to offset passive gains from a future event (like selling a property).

The final category of who benefits most from chattel appraisals are Real Estate Professionals in the eyes of the IRS. Real estate professionals can always use unlimited passive losses to offset their passive gains. This helps decrease their tax burden and allows them to keep much more of the money that their various investments earn.

One question that often arises is whether a chattel appraisal is still an effective tax strategy if an owner decides to turn their primary residence into a rental. It will be effective, though there are some calculations that need to be made by the residing CPA to determine the proper basis.

When a property is converted to a rental it is as if it was purchased that day and depreciation can begin. It is not a change in accounting method because the CPA did not have an accounting method before it became a rental. For a residence turned rental, the chattel appraisal would be based on what the property had the day it was originally purchased.

Q. Does my investment property qualify for a chattel appraisal?

The IRS sets a few requirements as to whether a property can qualify for a chattel appraisal. You must be the owner of the property and it must be used for business or an income-producing activity.

It is not always recommended to conduct a chattel appraisal on properties that have had filed taxes on them for two consecutive years, unless it is a multi-unit building or otherwise extraordinary property (i.e., not a standard single family home).

National Chattel Experts does not recommend chattel appraisals on fix-and-flip properties, except under very special circumstances.

Q. What about properties I've owned for several years?

We’d really need to look at just how long you’ve been holding the properties, and there are really two reasons why:

1) The IRS recommends that we appraise the personal property based on what was there at the time of purchase. So, if you’ve owned your property for three to four years, there’s hardly any way we could tell the quality and condition of the original items. The Good Lord only knows what can happen with tenants in that amount of time! The best we would be able to do is appraise based on the current quality and condition, and it is true that you would have lost substantial value (that’s hundreds of dollars, by the way) between a refrigerator that was upgraded and brand new versus one that was upgraded and worn.

2) If you have completed a renovation, however, the game is a bit different. Even if you’ve owned your property for a few years, and then do a renovation on it, you can employ the accelerated depreciation towards those new items. What’s more—you should alert National Chattel Experts, and we would need to do a 2-part appraisal for you.

Part I: Because you can actually write-off those items that are replaced, you would want an itemized list and valuation of those items, first.

Part II: We revisit the property after all old items have been replaced, do an appraisal on all the new items--and despite how long you’ve held the property, you can begin your accelerated depreciation.

CPAs have varying methods of dealing with “catch-up” accelerated depreciation, but it is safe to say that since depreciation is an election (meaning a tax benefit you can take or leave), there should be no penalty for going back across two years of ownership and beginning accelerated depreciation with your chattel appraisal.

Q. If you are documenting the old chattel in the appraisal, how do you document the value of the new chattel once the replacement has taken place?

Good question. In order to do this, you would need National Chattel Experts to visit your rental unit twice. The first time, we would capture the current state of the property and provide a valuation which, once submitted to your CPA, could be a one-time write off in the year you do your renovations. After your unit had been renovated, we would visit again and do a chattel appraisal with the new fixtures in place, and provide an appraisal that would start you on your 5 and 15 year depreciation schedules.

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Q. If I buy new appliances or do a rehabilitation, what is the difference between depreciating the personal property and just expensing the cost of the upgrades off my taxes?

Depreciating the personal property allows you to lower your capital gains tax over the next 5 years, and provides steady depreciation deductions more valuable than your standard straight-line method.

On the other hand, expensing the personal property allows you to write off or lower your taxes only the year it was installed. Having a one year write-off expensing personal property could potentially cost you hundreds or thousands in the long run.

You should ask your CPA about whether a quick expense (as in under Section 179) is a better strategy for you opposed to accelerated depreciation--it will depend on mostly on your investment strategy.

Q. What's the relationship between 179 property and the stuff you're talking about?

Let’s get clear on the question here first—there is no such thing as section 179 property, per se. Both Section 179 and chattel appraisals deal with tangible personal property, or chattel. Section 179 alludes to a kind of activity, rather than a kind of property. Section 179 allows a taxpayer to take deductions on certain kinds of property, and to take a deduction under Section 179 means that you will expense the property in one year only.

--This is as opposed to taking depreciation, which lasts over 5, 15, or 27.5 years in the residential investment world. So whereas you may be able to take certain one-time deductions under 179 (which in fact is a really great deal) you should consider how much more or less you will get back over the period of 5 years through accelerated depreciation. Depending on your property, you should literally calculate whether it is more beneficial to take the one-time gift, or to exercise the gift that keep on giving for 5-15 years. Different strategies will suit different investors, and different properties.

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Q. How many years can I depreciate the property off my taxes?

The IRS typically assumes a five year life-span for most personal property, although somepersonal property has a life-span longer than five years. A decent rule of thumb for residential properties: personal prorepty found inside has a 5 year tax life, and that which is found outside has a 15 year tax life.

Assuming you keep your investment property for five years, you will be able todepreciate the personal property on your taxes each year during those five years. If you kept a property for 17 years, however, you will have exhausted both the 5 and 15 year depreciation schedules, and will still have the 27.5 year schedule creating smaller deductions.

Q. What qualifies as land improvements (for accelerated depreciation)?

A good rule of thumb is to consider what is outdoors, but what is not the land itself. Some of the land improvements on the 15 year depreciation schedule include (and there are more than these) asphalt paving, concrete paving (reinforced and unreinforced), decorative paving, sidewalks and concrete, covered parking garages, parking lot bumpers, light poles, flag poles, pools and their accoutrements, detached spas, landscaping (rock and foliage), lawn areas, sprinkler systems, tennis or basketball courts, all kinds of fencing (wood, metal, split rail or solid board), sea walls, foundational walls, trash enclosures, fountains and ponds, detached storage rooms or storage sheds, covered patios and porches, awnings and gutters—to name a few.

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Q. So, how many years of ownership before a chattel appraisal is of no use?

Assuming there are no renovations involved (see above "Properties Owned for Several Years"), it is safe to say that after having held your property for about 4 years, there would be little benefit. Again, this is partially because the appraiser would have much difficulty appraising on the basis of what was there at the time of purchase. Plus, we are only dealing with a 5 year schedule (and 15 for landscaping).

Just remember that the “years of ownership” consideration can pretty much be wiped out if you do a renovation or complete remodel.

Q. What about my business office condo I’ve had 3 yrs?

National Chattel Experts isn’t yet positioned to bring you commercial cost segregation, but we are working with Marshall & Swift and a commercial company that can service your commercial buildings right away. Bes sure to let them know you were referred by National Chattel Experts for the best experience possible:

Commercial Cost Control: www.commercialcostcontrol.com

Check the website for contact information as they have offices in Dallas/Fort Worth, TX, Pittsburgh, PA, Phoenix, AZ, Kansas City, MO, and Atlanta, GA, though they certainly accept projects outside of those particular geographical regions.

Q. The value you receive for Chattel Appraisals is best when complete with in the 1^st two years of owning your investment property. Why?

When you purchase your Real Estate Investment the personal property is usually in its best condition, and therefore has its optimum value. As your tenants use the property, and with the passage of time, the property naturally looses some of its value. The word depreciation actually means the loss of value due to the passage of time or damage. It is assumed that depreciation happens naturally, as a function of time and the people living in your unit, which may be in part why there is even a tax allowance for it.

Q. I am ordering an appraisal for refinancing on my investment property. Would a chattel appraisal take the place of this property appraisal?

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NO, not at all. Real property appraisals are used for lending purposes, while personal property (read: chattel) appraisals are used solely for tax purposes. There are more differences between the two, for example that real property appraisals have little economic value to the purchaser, and that they mostly rely on public data to determine value. Chattel appraisals have huge economic value to the purchaser and use private-fee based information to determine value.

Q. How does accelerated depreciation affect tax obligation for capital gains?

Capital gains are not affected by accelerated depreciation, since capital gains and depreciation are part of two completely different calculations in taxation. Check with your CPA on this for an in-depth guide. NCE is restricted from talking too much about this, as we are not CPAs and do not and cannot give tax advice.

Q. If you bought a house and had it for about 6 months, but were rehabbing it and so did not have tenants and now are selling it, can you still get a chattel appraisal?

You can still have a chattel appraisal, but we wouldn’t really want to sell you one. We never recommend this tax strategy for fix-and-flip projects as it really functions best with longer-term holds on properties. Plus, if you never had any tenants, it could raise a giant red flag to the IRS since you would clearly be trying to amass a “paper loss.”

We have, however, been approached by fix-and-flippers (with tenants, however) who understand that if they aren’t holding the property that long, the accelerated depreciation is really a no-interest loan from the IRS which would (in part) get paid back at the time of sale through recapture tax. If you approached us with this attitude, we would clearly see that you had a good grasp on the strategy and would then sell it you. But we do not recommend it.

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