You just wrote an $8,500 check for a new HVAC system in your rental property, and now you’re wondering if you can deduct the entire amount this year on your taxes. 

Many landlords mistakenly assume HVAC replacements qualify as repairs that can be fully expensed immediately, only to discover during tax filing that these systems are considered a capital improvement. For residential rentals, that means you’ll recover the cost over 27.5 years.

In this guide, you’ll learn the exact depreciation period for HVAC systems in rental properties, how to calculate your annual deduction correctly, and strategic planning approaches that could potentially accelerate your tax benefits. 

We’ll also provide a simple tracking system to help you claim these deductions for the full depreciation period.

Calculating and reporting HVAC depreciation

Unlike many repairs that can be deducted immediately, your new HVAC system is considered a capital improvement that must be depreciated over time, just like your rental property improvements.

Example calculation

Here’s a step-by-step example of how to calculate depreciation for your new $8,500 HVAC system in your residential rental property:

Step 1: Determine the depreciable basis

Your depreciable basis includes the cost of the HVAC unit itself plus all installation costs:

• HVAC unit: $7,200
• Installation labor: $1,100
• Permit fees: $200

Total depreciable basis: $8,500

Step 2: Apply the recovery period

For residential rental property, the HVAC system falls under the 27.5-year recovery period using the Modified Accelerated Cost Recovery System (MACRS).

To calculate your annual depreciation deduction, you’ll use the following formula:

• Total depreciable basis / Recovery period = Annual depreciation deduction
• $8,500 ÷ 27.5 = $309.09 per year

Step 3: Calculate first-year depreciation (mid-month convention)

The IRS requires using a “mid-month convention” for residential rental property. This means you begin depreciation from the middle of the month in which you place the asset in service, regardless of when during that month you actually started using it.

Since our example HVAC was installed in July:

• Months remaining in year after mid-July: 5.5 months
• First-year depreciation: ($309.09 × 5.5) ÷ 12 = $141.66

Step 4: Integrate with existing depreciation schedule

Let’s say you purchased your rental property four years ago for $275,000, and the property has been continuously rented since then. Of that purchase price, $25,000 was allocated to the land (which isn’t depreciable), leaving $250,000 for the building and its components.

You’ll need to add this new HVAC system as a separate asset on your depreciation schedule. Your existing building depreciation continues unchanged:

Original building (minus land):

• Original basis: $250,000
• Annual depreciation: $9,090.91 ($250,000 ÷ 27.5)
• Current year (Year 4) building depreciation: $9,090.91

New HVAC system:

• Basis: $8,500
• First-year depreciation: $141.66
• Future annual depreciation: $309.09

Total depreciation deduction for current tax year: $9,090.91 + $141.66 = $9,232.57

In subsequent years, you’ll claim $9,090.91 for the building and $309.09 for the HVAC system, for a total annual depreciation of $9,400 until the HVAC’s recovery period changes or ends.

While depreciation is a non-cash expense, it directly reduces your taxable rental income each year.

The annual $309 depreciation deduction for the HVAC could save you more than $100 in taxes annually (depending on your tax bracket) while improving your cash flow over the system’s 27.5-year recovery period. That’s in addition to the tax reduction you realize from your rental property depreciation.

Reporting depreciation

Once you’ve calculated your HVAC depreciation, you’ll need to report it correctly on your tax return, using IRS Form 4562, Depreciation and Amortization.

When to file Form 4562

You must file Form 4562 in the first year you claim depreciation for your newly installed HVAC system. This is true even if you’ve owned the rental property for years. Any time you place a new depreciable asset in service, Form 4562 comes into play.

Completing Form 4562 for your HVAC system

Here’s how to report your new HVAC system depreciation on Form 4562:

Part I (Section 179): Skip this section for rental property HVAC systems, as Section 179 expensing doesn’t apply to assets used in residential rental activities.

Part III (MACRS Depreciation): This is where you’ll report your HVAC depreciation.

• Line 19a: For residential rental property assets, check the “Residential rental property” box
• Column b: Enter the month and year placed in service (July 2024 in our example)
• Column c: Enter the basis for depreciation ($8,500 in our example)
• Column g: Enter the depreciation deduction for this year ($141.66 in our example)

Part V (Listed Property): HVAC systems are not considered listed property, so you can skip this section.

Summary: Complete line 22 to total all your depreciation deductions.

Ongoing reporting in future years

After the first year, you generally won’t need to file Form 4562 for previously reported assets. Instead, you’ll simply report the total depreciation amount directly on Schedule E (for rental properties) without completing Form 4562 again for the same HVAC system.

Special considerations and common mistakes

Understanding these special considerations—and avoiding common pitfalls—can mean the difference between maximizing your deductions and facing IRS scrutiny.

MACRS: The standard method

The Modified Accelerated Cost Recovery System (MACRS) is the default depreciation method for most rental property components, including HVAC systems. Under MACRS, residential rental property components use a 27.5-year recovery period with straight-line depreciation.

Repair vs. improvement

The IRS draws a clear distinction between repairs (immediately deductible) and improvements (which must be depreciated). Here are some examples of each:

Repairs

• Fixing a broken compressor
• Recharging refrigerant
• Replacing a damaged fan motor
• Routine maintenance
• Minor parts replacement

Improvements

• Complete HVAC system replacement
• Upgrade to a more efficient system
• Adding central air to a property that didn’t have it
• Major system overhauls that significantly extend the useful life

A good rule of thumb: If the work keeps your property in good operating condition, it’s likely a repair. If it adds value, extends the useful life, or adapts the property to new uses, it’s an improvement that must be depreciated.

Documentation best practices

While not submitted with your tax return, maintain detailed records of:

• Purchase and installation receipts clearly showing the date of service
• Contracts with HVAC contractors detailing the scope of work
• Proof of payment through canceled checks or credit card statements
• Building permits and inspection certificates
• Property improvement specifications including make, model, and energy ratings
• Photos of the old and new systems
• Service records showing history of repairs vs. replacements

Organizing these documents by property in a digital format with backups can save significant headaches if you’re ever audited, sell the property, or need to calculate adjusted basis for any other tax purpose.

Tips for Tracking HVAC System Depreciation

Tracking your HVAC depreciation over 27.5 years using a spreadsheet is possible but can become cumbersome, especially if you own multiple rental properties or are claiming various types of depreciation simultaneously.

A simpler solution is to use an advanced accounting tool specifically designed for rental properties, like Stessa (it’s free to get started).

Stessa’s real estate balance sheet feature automatically tracks capital expenses – including your HVAC system – along with property value and outstanding mortgage balance. This gives you a more accurate picture of your true equity position over time.

The platform automatically categorizes your income and expenses, assigning them to the correct property and expense category. You’ll have a comprehensive dashboard that monitors your property performance in real time, helping you maximize returns on your HVAC and other investments.

Today, over 300,000 rental property investors use Stessa to track their portfolios. The platform handles an unlimited number of properties, whether you own single-family rentals, residential multifamily buildings, or vacation rentals.

The Stessa Tax Center is free for members of the Stessa Community. It includes a suite of free tax resources created in partnership with The Real Estate CPA, helpful how-to articles detailing tax preparation best practices, and videos to help you get the most from our software.

With Stessa, you also get access to things like:

• Automated accounting tools
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Go here to start using Stessa for free.

*Stessa is not a bank. Stessa is a financial technology company. Terms and conditions, features and pricing are subject to change. This article, and the Stessa Blog in general, is intended for informational and educational purposes only, and is not investment, tax, financial planning, financial, legal, or real estate advice.