Are Special Assessments part of SHST limits?

[hogwell]

I understand that Special Assessments are normally considered Land Improvements and add to the land's basis and depreciated.

But what about when the Safe Harbor for Small Taxpayers (SHST) is elected?

Since the SHST only applies to the rental BUILDING, is it true that any special assessment tax paid is not part of the total expenses subject to the "2% of unadjusted basis" limit?

And the Assessment must be capitalized as not part of the SHST election?

[Carl]

It depends on what the special assessment is for, and what entity assessed it. For examples see IRS Pub 527 page 8 at https://www.irs.gov/pub/irs-pdf/p527.pdf

In the example, it uses streets and curbs. For example, a dirt road gets paved and sidewalks are installed. Your municipality imposes a $10,000 assessment on all residents in the subdivision where they do this. You have no direct ownership in it. But it does increase the value of your property. Your $10K assessment gets added as a land improvement and is "NOT" depreciated for two reasons.

 - You have no ownership *control* directly or indirectly of the new streets and sidewalks.

 - It doesn't become "a material part of" the structure that you do own and do have control of.

As another example:

You own a condo unit. One of 10 units in your building and there are 5 buildings - meaning a total of 50 condo owners. The HOA/Condo association assessed a $10K assessment on each unit to pay for the following on all buildings:
- New roof

- repair of stairways in a few buildings that are in need to retain their safety standards of use.

- Repainting of curbs and parking spaces to clearly identify no parking areas, resident only areas, and handicap parking.

- Additional lighting in hallways/walkways to increase safety for residents/guest at night going to/from the parking lot.

All of the above are property improvements for three reasons.

1) A majority of the improvements are without question "a material part of" the structure you own.

2) There is no doubt that a majority of the improvement cost is for those things that add value to the structure, more so than the land.

2) As a condo owner that pays condo dues, you have an ownership interest in the common areas and you do have a say as a member of that association in how the common areas are managed and utilized.

These types of improvements would be classified as a property improvement and depreciated over 27.5 years.

IN a situation where it's hard to make a call on weather it should be classified as a non-depreciable land improvement or a depreciable structure improvement, you can get a breakdown of the estimated itemized costs from the entity imposing the assessment. Not only does that let you "see the numbers" for yourself, it also gives you the ammunition you need to prove your classification should you be questioned or challenged on it with an audit.

[hogwell]

This is very helpful information.

But what about using the SHST election?

Would a Special Assessment tax from a city for a subdivision (e,g, to improve street lighting) have to be included in the total that might disqualify the SHST election (because it exceeds 2% of the unadjusted basis of the building)?

If it is included in this total, I assume that it could then be expensed in one year, like any building improvement would be under the SHST, right? (assuming the 2% limit is not exceeded due to the tax).

In that case, would the tax amount still have to be added to the (land or building's) basis or does the SHST election override this?

More generally, if ANY building (or land?) improvement (e.g. cost of a new hardwood floor) is expensed under the SHST instead of capitalized, is it still added to the building's (unadjusted) basis? (I don't think so.)

I guess I'm asking what kind of costs can be expensed under the new Small Taxpayer Safe Harbor in one year and would these affect the land or building basis for a rental property in any way?

(e.g. what about mortgage interest? maintenance and repair costs? building improvements? property tax? etc.)

The IRS pubs I've read aren't very clear to me.

(e.g. https://www.irs.gov/businesses/small-businesses-self-employed/tangible-prop[product key removed]atio... )