Investors & landlords

I have a rental property with two new assets, one for $8000 (siding) and one for $6000 (roof). If I capitalize the $8000 asset, can the $6000 qualify for the safe harbor even though the total is more than $10,000?

Short answer is no. Both are classified as residential rental real estate and depreciated over 27.5 years.

I can not understand the tern Safe harbor.

For rental property, it's just tax terminology referring to depreciated property that qualifies to be expensed under what I guess you would call "an exception" as defined by congress in the statutes.

processing my 2018 (late) I encounter this safe harbor telling me I was okay to take it.

Been years since I dealt with 2018, but that was the first tax year the safe harbor option was available for rentals, I think. However, I am confident the program did not tell you in any way that it was "okay" to take it. At most, it asked if you wanted to take it. The program has no possible way of knowing if the asset you're dealing with, qualifies for safe harbor under the Tax Cuts and Jobs Acts of 2018. The program could only recognize that the cost was below the threshold, and asked if you wanted to take it. It's up to you to determine if you qualify to take it.

Additionally, with 2018 being the year of major tax law changes (and I do mean "major") the IRS publications as well as the statutes were severely lacking in clarity that year on a number of fronts. So the possibility of misunderstanding and misinterpretation was extremely high. Not only for tax filers, but for CPAs, tax preparers and others trying their best to help tax filers.

One thing I find that helps is a clear definition of property improvements, repairs, maintenance, etc. Or at least, as clear a definition in plain English we "simple folks" can actually make sense of.  Maybe the below helps?

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

Expenses for these types of costs are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria need to be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must retain or add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down. Good luck, and be aware you may go insane trying to understand it. 🙂

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and its assets in the usable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent for the very first time are not deductible.

Repair

Those expenses incurred to return the property or its assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent for the very first time are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a 2-bedroom house into a 3-bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.