@Anonymous_ wrote:
@Opus 17 wrote:
@Anonymous_ wrote:
See Treas. Reg. §1.263(a)-1(f)(3)(iii))
There is nothing directly about recapture in that section. But it does say that safe harbor expenses may not be capitalized. If it's not capitalized it does not add to the basis, and there is nothing to recapture from.
Once again, it is not recapture. As a result of the expensing of the asset, its basis is reduced to zero ($0).
When the asset is later sold, it is neither capital gain nor Section 1245 gain (recapture). Rather, the sale results in ordinary income.
OK, I see where you are coming from. That does apply to tangible property under the tangible property safe harbor, I agree completely.
It does not apply to building improvements under the safe harbor for small taxpayers §1.263.
https://www.law.cornell.edu/cfr/text/26/1.263(a)-3
The improvement (in this case, plumbing) becomes part of the building, and is not treated as an improvement for tax purposes. Paragraph (h)(7). See also example 1 under (h)(10). The building retains its original basis. (While a hot water heater is potentially tangible property when you bring it home from the big box store, I believe it becomes real property once installed. See (e)(2)(B)(2).)
In more detail the rule allows you to treat "repairs, maintenance, improvements, and similar activities" as expenses, as long as the total for such activities is less than the cap. Repairs and maintenance are deductible expenses anyway, the point of the section is to allow you to expense all your "repairs, maintenance, improvements, and similar activities" as long as they don't exceed the cap. (In other words, small taxpayers are relieved of the burden of keeping separate track of small improvements like a hot water heater or a new deadbolt or new chandelier as long as their total expenses are less than the cap.) Essentially, if this taxpayer must recapture a $900 water heater, they also have to recapture a doorbell camera, outside security light, deadbolt, toilet, or any other small addition to the property with an expected life of more than 1 year. And the whole point is, small taxpayers don't have to do that.
