Breaking: New Tax Change Could Save Thousands for Real Estate Investors!

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Everyone loves presents, and I am no exception. Each year, I look forward to opening presents from my husband, my son, and family and friends. What I did not expect was that I would actually receive a Christmas present from Uncle Sam as well this year. In fact, you may be surprised too to find out the present that Uncle Sam may have in store for you.

What exactly am I talking about? Well, if you have not heard yet, on November 24, 2015, the IRS announced a new tax break that can save real estate investors and business owners thousands of dollars in taxes for the 2015 tax year.

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The New Tax Change

The details of the new tax change are expected to be released in the coming weeks, but what we do know is that the government effectively raised the deductible amount of depreciable assets from $500 to $2,500. As such, when investors make improvements to properties or buy assets for the rentals, we may be able to take an immediate tax deduction instead of needing to depreciate it over many years. The net result is a potentially larger tax write off in 2015 to generate a higher tax refund. Let’s go over an example.

Related: How to Prove Tax Deductions as an Investor: A Guide to Tracking Receipts

Let’s assume Tom is a real estate investor who owns several rental properties, which are single family and multi-family units. In 2015, Tom made some improvements to his single family rental and incurred $2,000 for new cabinets and another $2,500 for new kitchen appliances.

Before the new tax change, all of the money that Tom spent above would generally need to be depreciated over many years. Instead of deducting the entire $4,500 spent on cabinets and appliances, it would generally be depreciated over a 5-year period. However, as a result of the new tax change, Tom may now be able to deduct the entire $4,500 spent on cabinets and appliances to reduce 2015 taxes.

Let’s assume that Tom’s tenants in the multifamily have been complaining about the old washers and dryers in the units. Tom was on the fence about replacing the old appliances because he knew it would be a large cash outlay. Tom was thinking about purchasing 50 washers and 50 dryers for $800 each. However, based on the old tax rules, Tom would generally need to depreciate the $80,000 asset purchases over 5 years, which delays his tax write-off.

With this new tax break, Tom is now able to potentially deduct the entire $80,000 of appliance purchases immediately in 2015 because each item is under the $2,500 threshold. Assuming that Tom is in the 40% tax bracket between federal and state income taxes, the new tax change can result in $84,500 of IMMEDIATE tax deductions increasing his refund by close to $34,000!

Significant Tax Savings

As you can see, for those of us who invest in real estate, this can result in significant tax savings for the 2015 year. The great thing about this tax change is that unlike a lot of other tax perks, this may be available for all business owners and investors, regardless of their income level. What is even better is that although the new change is official as of November 23, 2015, the benefits may be applied retroactively back to 2012. This means that for some taxpayers, this may be an opportunity to file amended tax returns to claim refunds on taxes paid previously.

Related: The Ultimate Guide to Real Estate Investment Tax Benefits

So what does this mean for you? If you have not done so yet, be sure to touch base with your tax advisor before December 31st to determine the best way for you to take advantage of this new tax break from Uncle Sam.

Investors: Have you heard about this new tax change? How would this affect your real estate business?

Let me know with a comment!

About Author

Amanda Han

Amanda Han of Keystone CPA is a tax strategist who specializes in creating cutting-edge tax saving strategies for real estate investors. As real estate investors herself, Amanda has an in-depth understanding of the various aspects of investing including taxation, self-directed investing, entity structuring, and money-raising.

64 Comments

    • Brandon Hall

      Yes, this is a modification to the De Minimis Safe Harbor increasing the old threshold of $500 to $2500. Only personal property assets and components of tangible property qualify for the election.

      The IRS has said they will not raise an issue during audit if you have been using a higher threshold than the $500 prior to 2016 when these new rules take affect. However, that doesn’t necessarily mean that you can go back and claim refunds as the author implies. There are rules and technicalities to qualify for the safe harbor. Tread with caution.

  1. Christian Bors

    Awesome post! Thanks for keep us updated. Any chance you or Brandon Hall will write a post about the GOP candidates tax reform plans and how they could potential affect investors? For example, carson would like to get rid of the mortgage deduction 🙁

  2. Jim Spatzenfeld

    So that means I can fully write off my new $15,000 roof because each of the bundles of shingles was under $2,500 each? Like if I buy 50 new washers and it goes by individual price than I would assume the same applies to my roofing shingles…. Or if I remodel my kitchen for $25,000 with each item under $2,500 I can write off the whole rehab in one shot? That’s what I get out of this article where it says Appliances under $2,500 and Cabinets under $2,500 are fully writeoffable. Or if I install 50 new windows for $300 each I can under the new law now write it all off in year one? That’s a big change!

    • Brandon Hall

      Jim – capital improvements do not qualify for this safe harbor. Only personal property items and components of personal property. So the roof and windows are excluded but some of the kitchen remodel, like cabinets and apliances may qualify.

      • Larisa G.

        Brandon,
        It is so confusing. Are you sure that capital improvements do not qualify for this safe harbor? IRS specifically says in IR-2015-133 that “It(safe harbor) applies to amounts spent to acquire, produce or IMPROVE tangible property that would normally qualify as a capital item”. Looks to me like capital improvements qualify for De minimis safe harbor.
        Could you please clarify it for us non-CPA folks?

        • Brandon Hall

          The way the actual code is written, Section 263A currently overrides the De Minimis Safe Habor which is why I’m saying that capitals improvements to not qualify under the safe harbor. Otherwise I’d agree with you 🙂

        • Larisa G.

          Brandon,

          I still do not see why you think that capital improvements do not qualify for this safe harbor. IRS specifically says that they qualify unless it is the property you produce for resale. Which means that improvements to rental properties are qualified. Could you please clarify with citation to laws/IRS documents for all of the investment properties owners as it make the whole world of difference between being able to expense repairs and improvements or have to capitalize/depreciate them over many years.

          Here is text from IRS ” Tangible Property Regulations – Frequently Asked Questions” (full text is here https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations):

          Neither the IRC nor prior regulations included a de minimis safe harbor exception to capitalization; you were required to determine whether each expenditure for tangible property, regardless of amount, was required to be capitalized. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don’t have to capitalize the cost of qualifying de minimis acquisitions or improvements. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building.

  3. Larisa G.

    Brandon,
    It is so confusing. Are you sure that capital improvements do not qualify for this safe harbor? IRS specifically says in IR-2015-133 that “It(safe harbor) applies to amounts spent to acquire, produce or IMPROVE tangible property that would normally qualify as a capital item”. Looks to me like capital improvements qualify for De minimis safe harbor.
    Could you please clarify it for us non-CPA folks?

  4. Jerome Kaidor

    This reminds me of my very own little depreciation story. Not really related, but….

    Every year, the property tax authority for each of my properties sends me a Personal Property form. I am to fill out this form by April. I used to sweat blood on those forms. Counting up all the appliances, tools, and supplies. Figuring out what everything was worth THIS year. Moving last years purchases back in the queue and adding this years purchases….best guess on how much paint etc we had on hand.

    Then a few years ago we had a major life change and our schedule and concentration were blown away. I didn’t manage to do the personal property forms. Oh no! What would they do to me? What they did, was to take their best guess and hit me with a 10%
    penalty – of the personal property tax. On my biggest property, that cost me a whopping fifty bucks.

    Fifty bucks to have somebody else struggle through that form? Sounded like a deal to me. I haven’t filled out one of those since.

  5. Larisa G.

    Brandon,

    I still do not see why you think that capital improvements do not qualify for this safe harbor. IRS specifically says that they qualify unless it is the property you produce for resale. Which means that improvements to rental properties are qualified. Could you please clarify with citation to laws/IRS documents for all of the investment properties owners as it make the whole world of difference between being able to expense repairs and improvements or have to capitalize/depreciate them over many years.

    Here is text from IRS ” Tangible Property Regulations – Frequently Asked Questions” (full text is here https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations):

    Neither the IRC nor prior regulations included a de minimis safe harbor exception to capitalization; you were required to determine whether each expenditure for tangible property, regardless of amount, was required to be capitalized. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don’t have to capitalize the cost of qualifying de minimis acquisitions or improvements. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building.

    • Brandon Hall

      Larisa – it’s a poorly written rule and not black and white. What I’m saying is that personal property and components of tangible property more certainly qualify for the De Min Safe Harbor (DMSH) than improvements.

      The way the code is currently written, § 263A contradicts and seemingly overrides the DMSH. This is even evident in the text you pasted: “However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale.”

      Note: is says “produced” OR “acquired for resale” NOT “produced for resale.” This is a stark difference.

      According to § 263A-2, “produced” is defined as: “construct, build, install, manufacture, develop, improve, create, raise, or grow.” This tells us that improving a unit of property (UOP) is considered “production” (read: improvement).

      The actual code for § 1.263(a)-1(f)(1):
      “In general. Except as otherwise provided in paragraph (f)(2) of this section, a taxpayer electing to apply the de minimis safe harbor under this paragraph (f) may not capitalize under § 1.263(a)-2(d)(1) or § 1.263(a)-3(d) any amount paid in the taxable year for the acquisition or production of a unit of tangible property nor treat as a material or supply under § 1.162-3(a) any amount paid in the taxable year for tangible property if the amount specified under this paragraph (f)(1) meets the requirements of paragraph (f)(1)(i) or (f)(1)(ii) of this section. But see section 263A and the regulations under section 263A, which require taxpayers to capitalize the direct and allocable indirect costs of property produced by the taxpayer (for example, property improved by the taxpayer) and property acquired for resale.”

      See the contradiction with § 263A? Additionally, in § 1.263(a)-1(f)(3)(v) we have:
      “Coordination with section 263A. Amounts paid for tangible property described in paragraph (f)(1) of this section may be subject to capitalization under section 263A if the amounts paid for tangible property comprise the direct or allocable indirect costs of other property produced by the taxpayer or property acquired for resale. See, for example, § 1.263A-1(e)(3)(ii)(R) requiring taxpayers to capitalize the cost of tools and equipment allocable to property produced or property acquired for resale.”

      The above is another poor explanation. If we read “production” as “improvement” and “other property” as including the existing UOP that we are improving, then the reference to § 1.263(a)-3(d) in the DMSH general paragraph nullified. We can also read “other property” as a the production of a new UOP. Or we can read “other property” as the need to capitalize costs allocable to current or future production.

      Lastly, we have the anti-abuse rules which are as follows:
      “(6) Anti-abuse rule. If a taxpayer acts to manipulate transactions with the intent to achieve a tax benefit or to avoid the application of the limitations provided under paragraphs (f)(1)(i)(B)(1), (f)(1)(i)(D), (f)(1)(ii)(B)(1), and (f)(1)(ii)(D) of this section, appropriate adjustments will be made to carry out the purposes of this section. For example, a taxpayer is deemed to act to manipulate transactions with an intent to avoid the purposes and requirements of this section if—
      (i) The taxpayer applies the de minimis safe harbor to amounts substantiated with invoices created to componentize property that is generally acquired or produced by the taxpayer (or other taxpayers in the same or similar trade or business) as a single unit of tangible property; and
      (ii) This property, if treated as a single unit, would exceed any of the limitations provided under paragraphs (f)(1)(i)(B)(1), (f)(1)(i)(D), (f)(1)(ii)(B)(1), and (f)(1)(ii)(D) of this section, as applicable.”

      So now it’s a question of how you have been doing business in the past. Have you always expensed every single item under $x? Now that all components of improved property are considered in the aggregate, does § 263A apply?

      To summarize: personal property and components of tangible property fall under the safe harbor. Will a new A/C unit? No idea, and I’d prefer that none of my clients be the guinea pig here. Until we have a court case or two that clearly tell us how to apply the DMSH, we won’t know how § 263A and § 1.263(a)-1(f)(1)(ii) interact with certainty.

      • Larisa G.

        Brandon,

        Thank you for your response. But I respectfully disagree . The section § 1.263A-2 specifically excludes improvements from the definition of “Produce”: “Produce means construct, build, install, manufacture, develop, improve, create, raise, or grow…except that improvements are excluded from the definition in this paragraph (b)(4)…”

        We cannot apply De minimis Safe harbor to the property produced or acquired for resale. But if improvements are not considered production, then it looks to me that we can apply De minimis Safe harbor to improvements made to real estate investment property.

        The language is Tangible property regulations is contradicting sometimes and hard to understand. But that is why IRS published explanations for small business ” Tangible Property Regulations – Frequently Asked Questions” (full text is here https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations): The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don’t have to capitalize the cost of qualifying de minimis acquisitions or improvement. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building

        It says specifically that improvements are covered by safe harbor unless they are part of the property you produced or acquired for resale. And improvements are excluded from the definition of “Produce”. The way I am reading this document from IRS created to help non-CPA small business owners to understand these complicated tax rules is that we can apply safe harbor and expense improvements unless they are part of the property we produced (built a new house for example) or acquired for resale.

        • Brandon Hall

          Larisa,

          You are correct, however that is not the definition under the UNICAP rules, which is the one I’m referencing in Sec. 263A-2.

          Perhaps the CCH group can explain it better than I can:

          ““Produce” for purposes of the de minimis rule is defined to mean construct, build, install, manufacture, develop, create, raise, or grow.
          Production does not include improvements to a unit of property (Reg. §1.263(a)-1(c)(2)). Production is similarly defined under the UNICAP rules but includes the direct and indirect costs of improving property. …

          …The uniform capitalization (UNICAP) rules require a taxpayer to capitalize amounts that are otherwise deductible under the de minimis safe harbor if the amounts constitute direct or allocable indirect costs of other property produced by the taxpayer (e.g., an improvement to a property) or property acquired for resale (Reg.§1.263(a)-1(f)(3)(v)).”

          Therein lies the confusion. The IRS has commonly held that improvements to a UOP fall under the UNICAP rules which applies in our case based on the following sentence: “However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale.”

  6. Michael Boyer

    Very tough to write about tax regs for the larger audience and even tougher to flesh out in the comments section, especially in the abstract. I think what may help some of the above questions is context.

    First, repairs versus capital improvements is tricky (facts and circumstances dependent). The IRS, in their wisdom, sought to simplify this (I know IRS and simple can be an oxymoron), so they did a brief 222 + page (sarcasm here) set of guidelines (IRS 2013-43 at: https://www.irs.gov/irb/2013-43_IRB/ar05.html#d0e782).

    In this master piece of “simplicity”, there were three “safe harbors” (this language tells you the whole repair versus capital is a stormy distinction, unclear, and even risky, as the comments also show). Among these was a de minimis exception (the other two I recall were routine maintenance and small business/taxpayers).

    The $500 per item limit in the deminimis safe harbor was thought, and the IRS is responding to comments here (http://www.accountingtoday.com/news/tax-practice/irs-raises-tangible-property-expensing-threshold-to-2500-76517-1.html) too small at the $500 limit (think compliance costs in tracking for years a 600 dollar washing machine, for example)…

    (so btw, keep those IRS comments coming, because if 150 letters gets it to $2,500, a BP crowd of concerned landlords could possibly push it to $5,000 with enough feedback..).

    A better example may have been one stackable washer dryer for $1,000

  7. Larisa G.

    Brandon,

    Thank you for your response. But I respectfully disagree . The section § 1.263A-2 specifically excludes improvements from the definition of “Produce”: “Produce means construct, build, install, manufacture, develop, improve, create, raise, or grow…except that improvements are excluded from the definition in this paragraph (b)(4)…”

    We cannot apply De minimis Safe harbor to the property produced or acquired for resale. But if improvements are not considered production, then it looks to me that we can apply De minimis Safe harbor to improvements made to real estate investment property.

    The language is Tangible property regulations is contradicting sometimes and hard to understand. But that is why IRS published explanations for small business ” Tangible Property Regulations – Frequently Asked Questions” (full text is here https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations): The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don’t have to capitalize the cost of qualifying de minimis acquisitions or improvement. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building

    It says specifically that improvements are covered by safe harbor unless they are part of the property you produced or acquired for resale. And improvements are excluded from the definition of “Produce”. The way I am reading this document from IRS created to help non-CPA small business owners to understand these complicated tax rules is that we can apply safe harbor and expense improvements unless they are part of the property we produced (built a new house for example) or acquired for resale.

    • Brandon Hall

      I’ve seen tax professionals reference this exception however have been unable to find it in the code. Perhaps they are talking about Sec. 263A-(b)(2)(B)?

      But let’s assume landlords are not subject to UNICAP, which is likely the case, why wouldn’t the IRS provide further guidance in the DMSH for small taxpayers? The DMSH modification seemingly points to small taxpayers, so hopefully there is some clarification coming.

      Additional confusion comes from Sec. 263(a)-1(f)(3)(v) which seemingly indicates there are multiple ways to determine improvements. For instance, the key words are “other property produced” (see below). This means that in order for the improvement to be subject to capitalization the costs must be incurred due to other property produced by the taxpayer. Well, a new water heater is a component of the building so “other property produced” won’t apply since it’s part of the building UOP. Yet Sec. 263A negates that. Bah. See code below:

      “(v) Coordination with section 263A. Amounts paid for tangible property described in paragraph (f)(1) of this section may be subject to capitalization under section 263A if the amounts paid for tangible property comprise the direct or allocable indirect costs of other property produced by the taxpayer or property acquired for resale. See, for example, § 1.263A-1(e)(3)(ii)(R) requiring taxpayers to capitalize the cost of tools and equipment allocable to property produced or property acquired for resale.”

      • Larisa G.

        Brandon,
        You are awesome and right on point. I have a feeling that the original intention of the De Minimis Safe Harbor was to allow expensing all tangible property, repair, maintenance, and improvements up to $500/$2500/$5000 to make it easier for taxpayers.
        But the actual wording of the Sec. 263 and New Repair Regs is so contradicting and not clear on improvements, that it makes it kind of risky for now to expense improvements until further IRS explanations comes to life. Even though it is probably legal to expense those improvements, and that would make landlords’ life much easier and save them a lot of money.
        So the safe strategy would be for now to expense only tangible property, repair, and maintenance under the De Minimis Safe Harbor, but not improvements until further IRS explanations. Do you agree?
        Also, do you practice in California?
        Thank you for all of your responses, you helped a lot.

        • Brandon Hall

          Yes I agree with this assessment. If clarification comes out allowing us to expense improvements, I’ll be doing backflips 🙂

          I do have CA clients.

          You seem to be quite knowledgeable about the code. I’ve thoroughly enjoyed our conversation!

      • Larisa G.

        Amanda,

        I know that it is $2500. As you can see above from our discussion with Brandon Hall, there is uncertainty if improvements can be expensed under the De Minimis Safe Harbor or only personal property items like appliances qualify. What is your opinion on that? Do you expense improvements up to $500/$2500/$5000 if they are not part of other bigger improvement?

  8. Deanna Opgenort

    $2,500 is MUCH easier to deal with.
    In my case, with one property the numbers are so small I’m not going to agonize over capitol improvement vs repair for the basic stuff. Roof=capitol improvement. Fixing fence = repair. Hot water heater….not sure, but honestly, how much could the penalty be on a $550 hot water heater…. IF I were ever audited.

  9. Fred K.

    Does this mean I can take the full deduction for the following or will these not qualify and have to be depreciated?
    Window replacements 10 at $169 each
    Carpet $1500.00
    Garnet counter top $1725
    Replacement of doors $250 each
    Gutters $980
    Porch rails $1800
    Garage door replacement $1200

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