I had several trees removed on my rental property. Half of them were removed because they are wrecking a retaining wall, and the other half were removed for aesthetic reasons/future landscaping work. The answer to this would be easy if it cost under $2,500, I would just do a safe harbor election as an expense. However, the cost was $2,550, and I believe that I should technically depreciate it. However, how do I depreciate something that wasn't a capital improvement? Do I just treat it as such, or should I deduct it as an expense?
While tree removal "might" retain the value of the depreciable structure, removing the tree does not really "add value" (in a sense) to anything. The cost has nothing to do with it. It's a deductible rental expense that I would probably call a maintenance expense.
Now you might be able to classify the tree removal as a land improvement. That would add to the cost basis of the land, and since land is not depreciated anyway, you would have no depreciation to deal with. But it would decrease any taxable gain on the sale of the land in the future.
Also, you got your understanding of safe harbor backwards. Those property improvements that qualify can be expensed if the cost is *LESS*, not more, than $2,500.
Thank you. Yes, I do understand that safe harbor is only for those expenses under $2,500 as I stated in my question: "The answer to this would be easy if it cost under $2,500, I would just do a safe harbor election as an expense."
The tangible property regulations (safe harbor) in no way abrogate your ability to deduct ordinary and necessary repair and maintenance expenses, even if those expenses exceed $2,500.
Please see this answer from PaulaM.
If the tree removal was necessary for overall safety of structure/tenants or resulted from weather damage (I assume this is your case), then it is an expense. The expense category you selected will work.
If the tree removal was part of a landscaping endeavor, then you would capitalize and depreciate.