Multiple 'de minimis' safe harbor elections?

12 Replies

Good Morning All! Two questions actually.

First, is the 'de minimis' limit for an individual landlord $500 or $2,500? I read Amanda Han and Matthew MacFarland's book and understand (or interpret it anyways) that the limit is $2,500 but several CPAs I've spoken to locally tell me it is $500.

Second, If I have several capital improvements, each costing less than the $2,500 threshold, can I expense them all instead of capitalizing them or am I capped at $2,500 TOTAL? For example (real numbers BTW):

1. New refrigerator - $726.00

2. New Dishwasher - $454.27

3. New Attic Insulation - $742.80

4. New Attic Ductwork - $2,500

Thanks!

@Account Closed

The limit is 2500 per Unit of Property. You can have multiple UOP. Dishwasher and Fridge are both eligible. 

New Attic ductwork is considered an improvement to the structural component of the building. ( The UOP for a building generally is the building and its structural components.), so you cannot take an expense election for ductwork even if below 2500.  These structural component are depreciated using the same life and method as the building itself. This is the same for plumbing, wiring, windows... So the improvement(not repair) to the structural component cannot be expensed. You can expense the repair, but if the improvement even below 2500, has to be capitalized. 

As per attic insulation, need more detail on what was done to conclude if you can expense that under de minimus.  Is it improvement or repair? 

Updated almost 3 years ago

Just realized, after Micheal's comments, that Under Tangible Property regulation, The Structural Component is subdivided into Building Systems. The key building systems are the plumbing system, electrical system, HVAC system, elevator system, escalator system, fire protection and alarm system, gas distribution system, and the security system. If the expenses to these systems are below 2500, you can elect de minimis, even if the the expense is an improvement.

Updated 6 months ago

Just realized, after Micheal's comments, that Under Tangible Property regulation, The Structural Component is subdivided into Building Systems. The key building systems are the plumbing system, electrical system, HVAC system, elevator system, escalator system, fire protection and alarm system, gas distribution system, and the security system. If the expenses to these systems are below 2500, you can elect de minimis, even if the the expense is an improvement.

Updated 6 months ago

Just realized, after Micheal's comments, that Under Tangible Property regulation, The Structural Component is subdivided into Building Systems. The key building systems are the plumbing system, electrical system, HVAC system, elevator system, escalator system, fire protection and alarm system, gas distribution system, and the security system. If the expenses to these systems are below 2500, you can elect de minimis, even if the the expense is an improvement.

@Ashish Acharya Thanks for your reply. The original ducting failed and had to be replaced. So this is an improvement, not repair? Also, the old insulation was too little (about 3 inches worth) so I had new insulation blown in the attic. Improvement?

On a side note, I had a breaker box replaced earlier this year. The old one was damaged. Improvement or repair?

@Account Closed

Improvements vs repair is a very subjective concept and depends if you are comfortable defending your position with IRA.

For me, Replacing entire duct is an improvement as you are restoring the property. it is restoration if expenditure returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use

I would say insulation  and breaker box is a repair. 

@Account Closed on his analysis, but most of all with his statement that the entire improvements vs repairs determination is a mess. 

The IRS always had tons of confusing rules about it, and then in 2014 they decided to simplify it and create new rules known as "Tangible property regulations." Guess what? Instead of simplifying, they made it arguably even more confusing. 

So your #1 and #2 are a clear yes, while #3, #4 and #5 (breaker box) are all debatable and depend on specific circumstances.

Also, $500 was bumped to $2,500 in 2016. Those who say $500 are not up-to-date with the law.

@Michael Plaks , how dare you!!   I am just kidding. haha

I have updated my comment.

Let me know if you concur with this interpretation.  Under Tangible Property regulation, the Structural Component is subdivided into Building Systems. 


The key building systems are the plumbing system, electrical system, HVAC system, elevator system, escalator system, fire protection and alarm system, gas distribution system, and the security system.


1) Expenditure to these systems is most likely to be an improvement because they are small UOP. However, the improvements to these building systems that are under the $2500 are eligible for de minimus

2) Expenditure to the building and Structural component (excluding building systems that are subdivided into building systems) are more likely to be an repair because the UOP is bigger and expenditure might not be betterment and restoration. Such as changing 2 out 4 windows would potentially qualify for repair. 

Also, If all the windows were changed, and it was an improvement but below 2500, it would qualify for de minimus. 


Do you concur? please let me know 

@Ashish Acharya

I interpret the Tangible Property Regulations the same way as you do. However, some of our colleagues interpret it differently. For instance, @Linda Weygant indicated at some point a desire to debate us.

There is not enough clarity in the Regs, so conflicting interpretations are quite possible.

What would flooring be classified as?  I had to replace my carpet and vinyl flooring because of wear and tear.  Also, is painting considered an improvement or repair in between tenants?

Originally posted by @Steve S. :

What would flooring be classified as?  I had to replace my carpet and vinyl flooring because of wear and tear.  Also, is painting considered an improvement or repair in between tenants?

Carpet can normally be expensed right away, under 3 different provisions to choose from.

Vinyl flooring can be expensed right away if under $2,500.

Painting between tenants is a deductible repair.

@Michael Plaks digressing from the overall topic here, what are your thoughts on being able to deduct rehab expenses up front instead of depreciating them so long as the owner make the property 'ready' and 'available' to potential tenants. For example, I bought a rental property that I had planned on sinking 5k in updates/rehab into. However, on day of closing, I stuck a rental sign in the front yard so, therefore, it was made 'ready' and 'available' on the day of purchase. It was fully livable as my rehab was just cosmetic in nature. I have timestamped documentation (emailed photos of sign in yard) of the make ready and available date for my records. 

Originally posted by @Account Closed :

@Michael Plaks digressing from the overall topic here, what are your thoughts on being able to deduct rehab expenses up front instead of depreciating them so long as the owner make the property 'ready' and 'available' to potential tenants. For example, I bought a rental property that I had planned on sinking 5k in updates/rehab into. However, on day of closing, I stuck a rental sign in the front yard so, therefore, it was made 'ready' and 'available' on the day of purchase. It was fully livable as my rehab was just cosmetic in nature. I have timestamped documentation (emailed photos of sign in yard) of the make ready and available date for my records. 

The only possible answer is "it depends"  :)

Depends on the composition of the $5k job. 

@Michael Plaks my apologies, I should have been more clear that the scope of work in the rehab will all fall within the de minimis threshold of $2,500 for each independent project (i.e. $1,500 for painting, $500 for yard cleanup, etc etc).

Originally posted by @Account Closed :

@Michael Plaks my apologies, I should have been more clear that the scope of work in the rehab will all fall within the de minimis threshold of $2,500 for each independent project (i.e. $1,500 for painting, $500 for yard cleanup, etc etc).

 Most likely yes, but still wonder about the remaining $3,000