To put it simply, “chattel” is personal property (Section 1245). It can also be thought of as movable property (comes from the French) in contrast to immobile property – the land and the buildings (i.e. the house itself). Chattel in your real estate investments includes things like appliances (stoves, refrigerators, dishwashers, clothes washer/dryers, etc), kitchen or bathroom cabinetry, curtains and window blinds, furniture you own as the owner of the property (vs. that owned by the tenant), carpets not permanently attached (not glued down), etc.
Chattel is important to residential real estate investors because these items have shorter depreciation schedules than the real property (Section 1250) they’re a part of. Whereas residential rental property (the structure) has a 27.5 year depreciation life, chattel items will have a depreciation schedule of only five or seven years. This allows you to accelerate the amount of time it takes to expense these items off your income vs. simply depreciating them as part of the structure as a whole.
By way of example, let’s assume you purchase a rental house for $100,000 excluding the land value. Using a normal 27.5 year depreciation schedule, each year you get to deduct approximately $3600 in depreciation expense from your rental income. If, however, you had a chattel appraisal done and determined that $25,000 of your $100,000 investment consisted of chattel with a five year depreciation life your total depreciation for each of the first five years would be increased substantially. Instead of just $18,000 in total depreciation deductions over the first five years of ownership ($3600 x 5) you would have approximately $38,500 qualifying to write off ($25,000 in chattel plus $2,700 per year on the remaining $75,000 value of the structure) – a $20,500 difference! That’s huge!
What does that mean to you in real after-tax dollars and cents? Obviously it depends on your income-tax bracket, but if you’re like most of us rental property investors it would be 35% (discounting any state income tax you may be subject to). So, if you’re at 35% that means an extra $8,750 for those first five years plus your regular 27.5 year after-tax amount of $945 per year.
A chattel appraisal or mini-cost segregation study, usually will run about $2500 or less, depending on the size of your property…but you do the math. Does it make sense to spend $2500 or as little as $1500 to get back an extra $8,000 or $9,000?
