De minimus Safe Harbor

2 Replies

Hi everyone - 

I purchased my first property last year and I'm starting to put together my taxes for the year. I purchased the property in May and repaired it over a couple of months before placing it into service in July. I'm working on establishing the cost basis and how the de minimus safe harbor effects this. Reading through the NOLO book, it states that any expenses that occur before the property gets placed into service needs to be added to the cost basis of the property. This is unless the expenses can be deductible under the de minimis safe harbor. 

Does this apply to all supplies and materials that are under $2500? i.e. all paint, screws, electrical switches, sinks, etc? Also, for any items over $2500 that were installed before the in service date, do they have to be depreciated over 27.5 years along with the property? Or can those still be broken out and depreciated over the time as stated by the IRS? 

Thanks!

Originally posted by @William Thomas :

Hi everyone - 

I purchased my first property last year and I'm starting to put together my taxes for the year. I purchased the property in May and repaired it over a couple of months before placing it into service in July. I'm working on establishing the cost basis and how the de minimus safe harbor effects this. Reading through the NOLO book, it states that any expenses that occur before the property gets placed into service needs to be added to the cost basis of the property. This is unless the expenses can be deductible under the de minimis safe harbor. 

Does this apply to all supplies and materials that are under $2500? i.e. all paint, screws, electrical switches, sinks, etc? Also, for any items over $2500 that were installed before the in service date, do they have to be depreciated over 27.5 years along with the property? Or can those still be broken out and depreciated over the time as stated by the IRS? 

Thanks!

This is more complicated then you think. Looks Like you do your own research so I will give you some references:

Two things: 

1) You must capitalize the cost for work performed prior to the date that the unit of property is placed in service by the taxpayer. (Unless you qualify safe harbor) [Reg. 1.263(a)-2(d)(1)]. 

2) The Safe harbor limit of 2500 applies to each Unit of property. 

Under §1.263-3(e)(2)(i), the building and its structural components (other than the structural components designated as building systems. Building systems include the heating, ventilation, and air conditioning (HVAC) systems; plumbing systems; electrical systems; escalators; elevators; fire protection, alarm, and security systems; gas distribution systems; and other systems identified in published guidance.) is a single unit of property. The amounts paid to rehab must be capitalized as amounts to acquire the building unit of property because they were for work performed prior to you placing the building in service. Thus work done such as "repair cement steps, refinish wood floors, patch holes in walls, and paint the interiors and exteriors of the building." are added to the basis of the property. As the work done is going to be more than $2500 to the Single UOP, you have to capitalize the repairs and improvements. 

Yes, the new items such as an appliance or Building Systems qualified as each UOP, they can be expensed as de minimis if each UOP is less than 2500 each.  If  more than that, they need to be depreciated based on their own depreciable life ( building systems - 27.5 years) 

Just to make sure I'm understanding this completely, any work that totals less than $2500 within the building system does not get added to the basis and can be deducted under the de minimus safe harbor. For example, if I spend $1000 total on repairing/improving the electrical system before placing the property into service this can be deducted. Any work outside of the building systems needs to be added to the basis and depreciated over 27.5 years. Is this correct?