Writing Off Improvements- Safe Harbor

12 Replies

I just read this article here and I wanted to confirm the info-

https://www.nolo.com/legal-encyclopedia/small-taxp...

So, it sounds like I am able to write off some of my improvement expenses, as long as it is less that 2% of the basis of my property?  I qualify as being a small time investor. So, as long as my improvements and repairs are under 2% of my basis, I can file that paperwork and write all of the costs off that year? I just wanted to confirm that. 

Thanks

@Joe Edwards-Hoff

Yes, Its lower of 2% or $10k. 
So, if you have 200k basis house,  you are limited to 4k. 

And remember this for the Total expense, not just improvements. You cannot ignore the repairs you made. ALL the repairs and also grouped with improvements to determine if the total expense is below 2% or 10k. 

One clarifying question- can I still deduct up to 2% even if I went over (which I dont expect to)? 

I've got a 300k building, and I do not forsee expenses going over $6k. Remodeling a single unit right now. That'll be around $2k. Do supplies count? All I saw mentioned was improvements and repairs. 

Originally posted by @Ashish Acharya :

@Joe Edwards-Hoff

Yes, Its lower of 2% or $10k. 
So, if you have 200k basis house,  you are limited to 4k. 

And remember this for the Total expense, not just improvements. You cannot ignore the repairs you made. ALL the repairs and also grouped with improvements to determine if the total expense is below 2% or 10k. 

Can the other expenses carry over to the next year? I am in a similar situation. I'll be putting about 20K into a rehab and keeping it as a rental. 

Originally posted by @Joe Edwards-Hoff :

One clarifying question- can I still deduct up to 2% even if I went over (which I dont expect to)? 

I've got a 300k building, and I do not forsee expenses going over $6k. Remodeling a single unit right now. That'll be around $2k. Do supplies count? All I saw mentioned was improvements and repairs. 

 If you go over the threshold, you can't deduct any of the amounts. Supplies can be expensed under regular supplies and you dont have to count them under this rule. 

Sorry you didn't tag me so I just this, 

Originally posted by @Dre Scott:
Originally posted by @Ashish Acharya:

@Joe Edwards-Hoff

Yes, Its lower of 2% or $10k. 
So, if you have 200k basis house,  you are limited to 4k. 

And remember this for the Total expense, not just improvements. You cannot ignore the repairs you made. ALL the repairs and also grouped with improvements to determine if the total expense is below 2% or 10k. 

Can the other expenses carry over to the next year? I am in a similar situation. I'll be putting about 20K into a rehab and keeping it as a rental. 

 No, if you are over the threshold, you can't deduct any of the expense so there is no question of carryover. 

@Joe Edwards-Hoff    

You asked a very specific question about the small taxpayer safe harbor, so you received a very specific answer from @Ashish Acharya .

However, you're asking about only one of the several available approaches to deducting repairs. You also have:

  • de minimis safe harbor
  • Section 179
  • 100% bonus

and possibly other ways to get a deduction.

Each one is a long separate discussion, which is best done with your accountant, of course.

@Dre Scott - this is for you, as well. Except you seem to be asking about the initial rehab, which has more limitations than a rehab after the property has already been in service.

Originally posted by @Michael Plaks :

@Joe Edwards-Hoff    

You asked a very specific question about the small taxpayer safe harbor, so you received a very specific answer from @Ashish Acharya .

However, you're asking about only one of the several available approaches to deducting repairs. You also have:

  • de minimis safe harbor
  • Section 179
  • 100% bonus

and possibly other ways to get a deduction.

Each one is a long separate discussion, which is best done with your accountant, of course.

@Dre Scott - this is for you, as well. Except you seem to be asking about the initial rehab, which has more limitations than a rehab after the property has already been in service.

Thanks for the reply Michael. Of the 20K, about half is materials. I know the total cost of the rehab could be added to the cost basis if I were selling the property after, but could I claim the improvements under the 100% bonus depreciation for 2018?

None of the rehab has actually started so I'm just trying to be proactive on finding the best possible tax strategy.

@Dre Scott

What you call materials and what the tax code calls materials are two different things, unfortunately.

The initial rehab, including both labor and materials, is generally not deductible right away, except for some specific items such as appliances, carpet, fence and similar things. Many details are involved, so there's no quick online cheat sheet that you could rely on. A lot of it is under the "it depends" category.

Which is why we accountants enjoy our job security. :)

Originally posted by @Michael Plaks :

@Dre Scott

What you call materials and what the tax code calls materials are two different things, unfortunately.

The initial rehab, including both labor and materials, is generally not deductible right away, except for some specific items such as appliances, carpet, fence and similar things. Many details are involved, so there's no quick online cheat sheet that you could rely on. A lot of it is under the "it depends" category.

Which is why we accountants enjoy our job security. :)

Job security indeed! I'm glad to pay a professional for a quality service that saves/makes me more money. I've been with my CPA for only one tax year so far so I'm definitely brining up all these questions to him.

@Ashish Acharya @Joe Edwards-Hoff @Michael Plaks

Gentlemen. I have a follow up question to the Small Tax Payer Safe Habor discussion. The maximum amount of 2% of repairs etc. refers to the unadjusted basis of the building unit. In the case of a single family house, is the reference to the building unit meant to be the house minus the land it sits on, or the building incl. the land?

@Andreas W.

Whatever value you assign to the building for an initial depreciation, that will generally be your unadjusted basis. 

You land will also have an unadjusted basis which will never get adjusted because you dont depreciate it.