Safe Harbor for new rental property

6 Replies

Hello. My wife and I are buying a rental property and we are a little confused about how we will have to account for some improvements we may want to make. Will we have to depreciate any of these or can they be deducted this year? Can anyone explain what our options are or point us in the right direction of a resource that is current?

If it matters the home price is $299,730 and we both are real estate professionals. 

Here are some of the things we may do. If there is an overall limit we'd have to stay under I can eliminate some of these ideas. 

Replace carpet with tile floor (~$2,600)

Add fencing (~1,000)

Buy refrigerator (~$1,000)

Add ceiling fans (~$500)

Add gutters (~$1,300)

Thank you! 

@Eric Peterson the De Minimis Safe Harbor allows you to expebse rather than capitalize repairs, maintenance and improvements under $2500 per item on the invoice.

That said, if all items are target one Unit of Property, then you take the aggregte value. An example would be an HVAC replacement - you can't divide the cost of the labor and parts to get each items below $2500. Instead we look at the total cost of the repair for that UOP.

@brandon hall I may not be understanding clearly. Would I add up all the items and they can't be above $2,500 or does each item by itself only have to be under $2,500? If each item only has to be under $2,500 is there some limit of 2% of the value of the property? 

@Eric Peterson there are multiple safe harbors and they aren't interconnected. Brandon is talking about De Minimis Safe Harbor (DMSH), that one does not have a 2% limitation.

2% rule applies to Safe Harbor for Small Taxpayers (SHST)

I'm a little unclear about using DMSH before property is ready for rent but if it was ready for rent, you could use DMSH for each of those that are less than $2,500 (basically everything except for the floor, unless you can get it under that limit.)

@Brandon Hall can they still apply DMSH to these improvements/repairs if they are made prior to the property being ready for rent? (On an unrelated note, The Real Estate CPA is a nice podcast by the way, glad to have you back!)

@Oleg Kio...I believe I can have the home ready for rent (at least advertised) prior to the work being done. However, I may not understand what exactly ready for rent means. I can definitely have the home ready to be shown and even sign a lease, then install the tile before a tenant moves in. 

By the way, thanks for mentioning the podcast. I just downloaded a few episodes. 

@Eric Peterson I haven't been able to find a concrete definition of what "ready for rent" means either. If you listed it for sale, it's OK to live in, ready to be shown and you can even sign the lease, it sounds to me like it's ready for rent.

If you want to be sure, I'd check with a CPA.