Investors & landlords

The answers to your questions are shown below.

QUESTION 1: Do I need to split out expenses during construction and/or operating expenses going forward, or can I just lump them together. Again, only would be doing this for tax purposes if necessary or beneficial. I'm thinking like do I need to track basis separately or something - particularly if I end up doing a substantial renovation or demolition/replacement of the existing house in the near future.

1. Operating expenses do not necessarily need to be broken down if you are treating this as or want to aggregate the activity.
2. Basis should definitely be tracked separately for each building.  When you sell a building down the road you want to have each asset listed separately for each one even if aggregating as one rental activity with several assets.
3. Capital improvements and/or renovations will be a separate asset but will also belong to one building. Think about that when you name the assets as you enter them.

QUESTION 2: I use de minimis safe harbor election (1.263(a)-1(f)) on this property. I do not believe I can use this on the new construction even though my contract breaks the costs down to below $2500 / item, or am I incorrect? Is there another recommended method of advancing depreciation? Should I be looking into cost segregation (I'm an architect so we've prepared these for clients before - but never understood how they affected their taxes) or something else? I'm looking for some direction so I can do my owner deep dive into it.

1. Yes, you are incorrect.  There are two types of safe harbor: 
   1. $2,500 DeMinimis Safe Harbor for equipment - This election is an option you can take each year that lets you write off/deduct items $2,500 or less as expenses instead of assets.
   2. Safe harbor Election Small Taxpayers: Here are the rules you need to meet to take this election:
      1. Your gross receipts, including all your other income, are $10,000,000 or less.
      2. Your eligible building has an unadjusted basis of $1,000,000 or less.
      3. The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits:
         • 2% of the unadjusted basis of your building or
         • $10,000
   3. What can I depreciate or expense with the business safe harbor method?
2. Simply, cost segregation is a tax deferral strategy that identifies assets within a building that can be depreciated over a shorter period.  The building itself and the capital improvements such as a roof, a room addition, siding, or other attachments to the building itself will be depreciated over the usual 27.5 year for residential rental property. 

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