Property Manager · New York, NY · Member since 2010 · 27 posts · 4 votes
Anyone familiar with the SHST (Safe Harbor for Small Taxpayers) - any insight here would be very much appreciated. Thank you!!
1) I understand the safe harbor to be the lessor of $10k or 2% of the unadjusted basis of the property. But the amount is only for R&M and improvements (like new appliances), correct? So I understand that the number for safe harbor purposes does NOT include any other operating expenses like landscaping, utilities or insurance?
2) Apparently, you are supposed to attach a letter saying that you elect to use the safe harbor. But what if you are filing electronically? Can you still attach this notification?
3) As an example, let's say new appliances are part of your safe harbor number, where do you put this on Schedule E? There is no line item for improvements like new appliances. So I guess you put that figure on Line 19 -"Other"?
Although the safe harbors are available that allow certain depreciable items to be expensed, they are optional. You can continue to depreciate capital items under the prior depreciation rules if you wish.
For my own properties, I am already at or near the maximum net passive loss allowance. Expensing a new water heater rather than depreciating it will just increase my suspended loss carryover. So, I have decided to ignore the new safe harbor rules and continue depreciating new capital assets under the old rules.
I had this same issue last year for #2 when I used HR Block software. I ultimately had to type up my elections and mail my returns in. Had I had my CPA do them then he would have just filed electronically since his is more professional software and has all the necessary options, as it should be.
While I understand the safe harbor, I will let the CPA @Brandon Hallexplain as he does it "much" better.
@Michael K. the SHST is a complex area, and it's new, so a lot of CPAs know little about it. Prior to seeking advice, you need to make sure you are dealing with a CPA with extensive real estate knowledge (BP is a great place to start!).
Answers to your questions below:
1. Repairs and improvements apply to this threshold. I will say this is the least attractive of the three safe harbors as the De Minimis Safe Harbor (DMSH) and the Routine Maintenance Safe Harbor (RMSH) will likely yield better results.
2. You attach a statement that tells the IRS you are utilizing the certain safe harbor. This will be e-filed with your return.
3. Safe harbors will be reported as an "Other" expense as - "De Minimis Safe Harbor Expenses" etc.
Although the safe harbors are available that allow certain depreciable items to be expensed, they are optional. You can continue to depreciate capital items under the prior depreciation rules if you wish.
For my own properties, I am already at or near the maximum net passive loss allowance. Expensing a new water heater rather than depreciating it will just increase my suspended loss carryover. So, I have decided to ignore the new safe harbor rules and continue depreciating new capital assets under the old rules.
The maximum net passive loss allowance is set by the tax code at $25K. This amount is reduced by $1 for every $2 that your MAGI exceeds $100K. Look at your tax return for last year. If you had negative amounts on line 21 or Schedule E, but smaller negative amounts for the same property on line 22 of Schedule E, then you had suspended losses last year, because you exceeded the maximum net passive loss allowance. If you did not have suspended losses, look at line 17 (Form 1040) and see how close your net rental loss is to $25K.
The maximum net passive loss allowance is set by the tax code at $25K. This amount is reduced by $1 for every $2 that your MAGI exceeds $100K. Look at your tax return for last year. If you had negative amounts on line 21 or Schedule E, but smaller negative amounts for the same property on line 22 of Schedule E, then you had suspended losses last year, because you exceeded the maximum net passive loss allowance. If you did not have suspended losses, look at line 17 (Form 1040) and see how close your net rental loss is to $25K.
Dave, I think you can look at Form 8582 Worksheet 6 as well. It lists for me the accumulated unallowed losses for each property. If you change who's doing your taxes or the software you use, you will need the record. (Bad news it may not be the same for your state return if you file in multi-states, at least so I'm told.) Not a tax guy, just have mine here in front of me. <Grin>
@Brandon Hall Great notes. With the numbers larger in 14 and 15 and better defined I started looking closer. Most of my losses carry forward so it didn't seem to help one way or another. This year (2015) I have a large depreciation recovery, 1250 gain. Is there a benefit one way or the other when you sell if you had used the Safe Harbor on a rental?