Expensing vs. Depreciating Assets Under New Tax Law

6 Replies

I am getting a bit confused about what capital improvement costs for my real estate portfolio can be immediately expensed vs need to be added to my basis and depreciated over time.  I am further confused by the concept of Bonus Depreciation and Section 179 expensing, and how that impact things.  Add to that confusion is the concept of Safe Harbor as it applies to all of the above.  Finally, understanding how the new tax law impacts all of the above rounds out my questioning.

Can anyone point me to a overview that talks to all of the above issues and spells things out clearly?

Originally posted by @Josh F. :

I am getting a bit confused about what capital improvement costs for my real estate portfolio can be immediately expensed vs need to be added to my basis and depreciated over time.  I am further confused by the concept of Bonus Depreciation and Section 179 expensing, and how that impact things.  Add to that confusion is the concept of Safe Harbor as it applies to all of the above.  Finally, understanding how the new tax law impacts all of the above rounds out my questioning.

Can anyone point me to a overview that talks to all of the above issues and spells things out clearly?

 You can now deduct personal property in real estate. Use this when over $2,500. But, you should check and see if it qualifies for the bonus deduction first. 

I remember hearing that this was not a good Tax Bill if you do wholesaling, I can't remember the specifics but you should look into it if you do wholesaling. I believe the question regards whether your wholesaling activity rises to the standard of being a "trade or business".

@Josh F.

Depreciation is not something that you would grasp right away if it is not your job to do taxes, (Let your CPA do all the hard work), but I get that you want to know the high-level.

Generally, all the improvements to the property needs to be added to the basis (not repairs – Although repairs will have to be added if done before placing a property in service).

All these safe harbors, bonus, and sec 179 is here to let us deduct cost rather than capitalizing it.

  • Safe Harbor: If your improvement for a unit of the property (UOP) is less than 2500 you can deduct it. ( if you RE portfolio is big enough and you have audited Financials it's 5000)
  • Bonus depreciation (100% going forward until 2023): Improvements to the building and system are not eligible for bonus depreciation. But there is something called QualifiedImprovement property. You cannot take bonus depreciation on the qualified improvement for the residential property (you can take bonus depreciation on the non-residential Qualified Improvement Property).
  • Section 179: Again new under new TCJA, you can take sec 179 on qualified improvement property on the Nonresidential property. Before tax reform, property used to predominantly to furnish lodging or in connection with the furnishing of lodging (property used in apartments) did not qualify as Section 179 property, But this restriction has been lifted, and property can qualify for section 179 full expensing (there is a limit). Some of the aspects are still unclear and we are waiting for clarification from IRS.

Hope that helps. It’s your CPA’s Job to do this. If you are deciding on making improvements, give your CPA a call before  taking an action. 

@Josh F.

Section 179 Expense
Section 179 Expense is not available for residential properties. It is now eligible for commercial properties under certain scenarios.

Repair Regs(de minimis safe harbor)
You can currently expense improvements under $2,500.
Repairs of any amount are currently expensed
Improvements above $2,500 are not currently expensed but depreciated over its useful life.


Section 179 is still not available for residential rentals.

This has a great impact however on short term rentals which likely qualify as commercial property.

@Josh F. I'm actually based out of the Seattle area- Feel free to shoot me a PM with any questions. As mentioned above depreciation is a tricky area.

Thanks everyone for your valuable input...

@Ashish Acharya - Few questions, which I might then take to a few others:

1) What qualifications would move me from 2500 to 5000.  A new HVAC ends up right in that sweet spot, so that is good to know?  Also, assuming 2500... in general are each of the repairs assessed seperately?  So if I am turning a unit, and spend $6000, but not one item is over 2500 can I expense it all at one time?

2) Can you please clarify what Qualified Improvement property is, and when it would apply that I could take bonus depreciation?

3) Re: Section 179, I'm a bit confused.  Are you saying that repairs and other such maintenance to residential units (even apartments) do not qualify under this section for immediate expensing, only such things as furniture?

It would be best to get in touch with @Natalie Kolodij . This is complicated stuff Josh. 

You asked for it, so  here it is:

You can expense 5000 per UOP( see below) if you have Audited Financial Statements. I dont think you do.

And yes 2500 is per UOP ( see below). There is no limitation on how much you can expense.

1) The safe harbor applies to amounts paid during the tax year to acquire or produce what the regs call a “unit of property” (UOP), you must meet these requirements:

  • (1) at the beginning of the tax year, the taxpayer has written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount (which will be 2500 for you), or with an economic useful life of 12 months or less;.
  • (2) the taxpayer treats the amount paid for the property as an expense on its books and records in accordance with its accounting procedures. ( do this on your bookkeeping software or whatever you utilize)
  • (3) the amount paid for the UOP doesn't exceed $2,500. as substantiated by the invoice
    • Note: The cost for the Unit of Property includes l additional costs (for example, delivery fees, installation services, or similar costs) if these additional costs are included on the same invoice with the tangible property.

Eg:

A purchases 100 printers at $500 each for a total cost of $500,000 as indicated by the invoice. Assume that each printer is a unit of property. A has accounting procedures in place at the beginning of Year to expense amounts paid for property costing less than $2500, and A treats the amounts paid for the printers as an expense on its books and records. The amounts paid for the printers meet the requirements for the de minimis safe harbor.

  • UOP for the tangible property capitalization rules, the UOP for assets other than buildings generally consists of all the components that are functionally interdependent (i.e., where placing in service of one component is dependent on the placing in service of other component(s)).
  • The UOP for a building generally is the building and its structural components.

2) Qualified Improvement property is mostly relevant to nonresidential property.

  • Qualified improvement property is an improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. However, qualified improvement property doesn't include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator or the internal structural framework of the building.

3) No, I didn't mean that. Sec 179 is an immediate expensing of the asset placed in service. All the repairs and maintenance has nothing to do with section 179.

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