Condo Rental Expenses - Renovation & Repair - $10k limit for expense

[jimlenz]

I have a condo that I have been renting for a couple of years.  I did some renovation on the 2 bathrooms this year and also had to replace pipes in the bathroom.  The condo association is in the process of replacing the pipes in most of the units with Pex as they are 35 years old and many are needing replacement.  I went ahead and replaced mine, since they were not going to as I did not want to have any future problems.  I didnt have to do this as they are the association responsibility.

I then went ahead and renovated the showers.  The cost to do the plumbing was $4,000 and the renovation was $9,000.  I know that if this amount is over $10,000 I would need to depreciate over 27.5 years.  My thought is that the plumbing is repairs and the shower is renovation.  Since the renovation is less than $10,000 I can expense it all this year.  

My only concern is if the plumbing would be considered part of the renovation and then I would have to depreciate.  This is a unique situation and I believe I am right but wanted to see if anyone has any thoughts on this topic.

Thanks in advance, Jim

[RobertB4444]

Both of these expenses are for things that improved the value of your condo and will last more than a year.  So they should both be depreciated.

However, the safe harbor election allows you to expense items that are depreciable normally but are expensed on your books and are not in excess of $5,000.  So you can expense the plumbing and depreciate the renovation.

Now a very dense amount of IRS regulation:

Here is the IRS language on what needs to be depreciated-

Repairs and Improvements

Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.

Improvements.

You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Table 1-1 shows examples of many improvements.

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.

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.

De minimis safe harbor for tangible property.

If you elect this de minimis safe harbor for your rental activity for the tax year, you aren’t required to capitalize the de minimis costs of acquiring or producing certain real and tangible personal property and may deduct these amounts as rental expenses on line 19 of Schedule E. For more information on electing and using the de minimis safe harbor for tangible property, see Tangible Property Regulations-Frequently Asked Questions.

Safe harbor for routine maintenance.

If you determine that your cost was for an improvement to a building or equipment, you may still be able to deduct your cost under the routine maintenance safe harbor. See Tangible Property Regulations-Frequently Asked Questions for more information.

And here's the IRS language on safe harbor elections-

What is the de minimis safe harbor election?

Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice).

These limitations are for purposes of determining whether particular expenses qualify under the safe harbor; they aren't intended as a ceiling on the amount you can deduct as business expenses under the IRC.

The de minimis safe harbor election does not include amounts paid for inventory and land. Additionally, it does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate under § 1.162-3(d). It does not apply to rotable and temporary spare parts that the taxpayer accounts for under the optional method of accounting under § 1.162-3(e).

Neither the IRC nor prior regulations included a de minimis safe harbor exception to capitalization; you were required to determine whether each expenditure for tangible property, regardless of amount, was required to be capitalized. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don't have to capitalize the cost of qualifying de minimis acquisitions or improvements. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building.

@jimlenz 

[RobertB4444]

Both of these expenses are for things that improved the value of your condo and will last more than a year.  So they should both be depreciated.

However, the safe harbor election allows you to expense items that are depreciable normally but are expensed on your books and are not in excess of $5,000.  So you can expense the plumbing and depreciate the renovation.

Now a very dense amount of IRS regulation:

Here is the IRS language on what needs to be depreciated-

Repairs and Improvements

Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.

Improvements.

You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Table 1-1 shows examples of many improvements.

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.

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.

De minimis safe harbor for tangible property.

If you elect this de minimis safe harbor for your rental activity for the tax year, you aren’t required to capitalize the de minimis costs of acquiring or producing certain real and tangible personal property and may deduct these amounts as rental expenses on line 19 of Schedule E. For more information on electing and using the de minimis safe harbor for tangible property, see Tangible Property Regulations-Frequently Asked Questions.

Safe harbor for routine maintenance.

If you determine that your cost was for an improvement to a building or equipment, you may still be able to deduct your cost under the routine maintenance safe harbor. See Tangible Property Regulations-Frequently Asked Questions for more information.

And here's the IRS language on safe harbor elections-

What is the de minimis safe harbor election?

Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice).

These limitations are for purposes of determining whether particular expenses qualify under the safe harbor; they aren't intended as a ceiling on the amount you can deduct as business expenses under the IRC.

The de minimis safe harbor election does not include amounts paid for inventory and land. Additionally, it does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate under § 1.162-3(d). It does not apply to rotable and temporary spare parts that the taxpayer accounts for under the optional method of accounting under § 1.162-3(e).

Neither the IRC nor prior regulations included a de minimis safe harbor exception to capitalization; you were required to determine whether each expenditure for tangible property, regardless of amount, was required to be capitalized. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don't have to capitalize the cost of qualifying de minimis acquisitions or improvements. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building.

@jimlenz 

[RobertB4444]

Both of these expenses are for things that improved the value of your condo and will last more than a year.  So they should both be depreciated.

However, the safe harbor election allows you to expense items that are depreciable normally but are expensed on your books and are not in excess of $5,000.  So you can expense the plumbing and depreciate the renovation.

The IRS rules on this can be very dense.

Here is the IRS language on what needs to be depreciated (scroll down to depreciation)

And here's the IRS language on safe harbor elections.

@jimlenz 

[jimlenz]

Thanks for the response.  

If I am reading you correctly, I can expense the $4,000 plumbing under repairs and the $9,000 for the renovation would be depreciated for 27.5 years.  Does it matter than the renovation x plumbing is less than $10,000?  The more I think about it, I believe the criteria is the lower of 2% of unadjusted basis or $10,000.  The unadjusted basis is probably $200,000 so that would be $4,000 so it is likely correct that I need to depreciate the $9,000.  Is that correct?  Thanks again.  

[RobertB4444]

Yeah, the renovation is adding value to the house so it should be depreciated as part of the basis for the full 27.5 years.

@jimlenz