Deducting rental furnishings

[wleighton]

I purchased a 4-plex in 2020. One of the units was rented from Feb-May. I lived there from June-Sept. Rented out again, furnished, from Oct-Dec.

1. What is the best way to deduct the furnishings for this unit? Is it true that items under $200 are able to be expensed as "supplies" or "other expenses"?

2. A few of the items were $198 before sales tax+shipping. After sales tax+shipping they were over $200. These items could not be expensed as supplies, because their total cost was over $200. Is this true?

3.  If I elect to take the de minimis Safe Harbor, would it apply to all of my rentals, or just this one property?

4. If I use the Safe Harbor election, would I have to do so every year?

5. If I take the 100% Bonus Depreciation, how would this affect my depreciation schedule in the future years? Will I add it to the accumulated depreciation?

6. If I take the 100% Bonus Depreciation, would I add it as a separate asset? I currently have each unit (1,2,3,and 4) as a separate asset for this property.  Could I lump all the furnishings over $200 together? And would the cost basis be the total price paid for these pieces of furniture?

The 100% bonus depreciation option seems a bit less complicated to me. I am concerned about meeting the requirements for the safe harbor election every year (specifically the 250 hours minimum). Also, because my furnished rental unit was used as my personal residence for over half the year, I think I may be disqualified from using this election. 

[DavidD66]

A lot of questions.  I think you may be confusing a couple of safe harbor elections.  There is a de minimis safe harbor election for depreciation.  Beginning in 2014 the IRS increased the amount that can be deducted by smaller taxpayers from $500 to $2,500.  If you make this election, you must use it for all qualifying expenditures.  It would apply to all of your rentals.  You do not have to make the election every year, just because you made it once.  It is a year by year choice.

If you take bonus depreciation, instead of expensing items, you will be capitalizing them and then depreciating the entire cost in the year placed in service.  So yes, it would increase your accumulated depreciation.

If you are treating the units separately, you would need to list the furniture associated with each unit separately.  It would be reported (expensed) on the Schedule E associated with that unit.  You could lump it all together per unit, and list as a single item.

There  is also Safe Harbor rule that applies to Section 199 deductions for rental property.  This is the one with the 250 hour per year requirement.

The following requirements must be met by taxpayers or Relevant Passthrough Entities (RPEs) to qualify for this safe harbor:

• Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
• For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
• The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
• The taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

[wleighton]

Hi David-

Thanks SO much for clearing things up for me. 

I was indeed confusing the de minimis safe harbor with the section 199 deductions safe harbor rule. Are they completely separate?

It seems to me that the de minimis safe harbor might be the best option for me with no drawbacks that I can foresee. 

Generally speaking and for future reference, is it true that tangible items under $200 are able to be expensed as supplies, and over that amount is when I would need to consider either capitalizing or applying the de minimis safe harbor election?

I am treating this 4-plex as one multi-family property on my Section E, with 4 depreciable assets (each unit).  Would it be better to use 4 separate section E's?

[Carl]

1. What is the best way to deduct the furnishings for this unit? Is it true that items under $200 are able to be expensed as "supplies" or "other expenses"?

Don't know where you got $200 from. Basically, A qualified asset that cost less than $2,500 can be expensed. But one of the requirements is that you can only do that in the tax year the item/asset was purchased. So if the furniture was purchased in 2020 for the express purpose of furnishing the rental property as a rental, you can expense the furniture in the rental expenses section. If the furniture was just items you had "on hand" that were purchased at some time in the past, you can't expense it.

2. A few of the items were $198 before sales tax+shipping. After sales tax+shipping they were over $200. These items could not be expensed as supplies, because their total cost was over $200. Is this true?

No.

3. If I elect to take the de minimis Safe Harbor, would it apply to all of my rentals, or just this one property?

It has to be applied equally for all assets in that asset class, regardless of what rental property that asset is in. You can't choose to expense some items classified as appliances/furniture, and depreciate other items in that same asset class.

4. If I use the Safe Harbor election, would I have to do so every year?

No. Once you deduct the cost of an item in a tax year, you can't deduct it again.

5. If I take the 100% Bonus Depreciation, how would this affect my depreciation schedule in the future years?

All that does is fully depreciate an item in the first tax year that item is placed in service. Yes, it adds to the accumulated depreciation.

6. If I take the 100% Bonus Depreciation, would I add it as a separate asset?

Yes. As you enter it in the Assets/Depreciation section, the program will "know" if it qualifies for the Special Depreciation Allowance (SDA, or what you call bonus depreciation) and offer you that option.

I currently have each unit (1,2,3,and 4) as a separate asset for this property. Could I lump all the furnishings over $200 together? And would the cost basis be the total price paid for these pieces of furniture?

You can. But I would suggest you separate things out and group them based on what unit they are in. Of course, that could present it's own paperwork hassle if you move things around among units in the future.

The 100% bonus depreciation option seems a bit less complicated to me.

First, will it "really" make any difference on your tax liability? If you have a mortgage on the property, I doubt it will. However, depending on when you sell the property it *will* make a difference on your taxes in the year you sell. Remember, when you sell rental property, you are required to recapture all depreciation taken and pay taxes on it in the year you sell it. Two things happen concerning depreciation recapture in the year you sell.

- The recaptured depreciation is added to your AGI for that year.

- The increased AGI has the potential to bump you into the next higher tax bracket in that tax year.

Generally, upon the purchase/acquisition of residential rental real estate, when you add up the deductible expenses of mortgage interest, property taxes, insurance and add that to the depreciation you're required by law to take every year on the property, those four items alone are usually enough to exceed the total rental income you will receive for the tax year. Add to that the other allowed rental expenses (repairs, maintenance, etc) and you're practically guaranteed to have no taxable rental income every year you own and rent out the property. (If you use the property for personal use for a period of time every year, this can have a direct impact on things.)

So it's perfectly possible that trying to claim all the depreciation early may not help your tax situation one bit. However, it can have the potential to hurt your tax situation in the future, especially if you sell the property before the assets would have been fully depreciated anyway under MACRS.

From my experience and perspective of things for my specific situation, what may save me a few pennies now, will moe than likely cost me may dollars later.  Remember, TNSTAAFL (There's no such thing as a free lunch.)

I am concerned about meeting the requirements for the safe harbor election every year (specifically the 250 hours minimum). Also, because my furnished rental unit was used as my personal residence for over half the year, I think I may be disqualified from using this election.

You're talking about the 20% QBI (Qualified Business Income) deduction. Don't confuse that with the Safe Harbor election. I can directly identify with your concerns. I myself own three rental properties (all residential) and even with all three combined I can't even come close to exceeding 100 hours a year directly involved in the management of the property. Forget about 250. I even had one year where I had two rentals go empty back to back. Even with me doing the work myself to turn each property around for the next renter, I still could not exceed a total of 100 hours for the year among all three of my rentals combined. Therefore I don't bother with the QBI stuff.

[DavidD66]

No, I would not report the property on four separate Schedules E.  

Supplies are not capitalized, regardless of the cost (unless you make an election to do so).  Tangible property with a useful life of more than one year requires capitalization, unless you take the safe harbor election.  If you take the safe harbor election, all purchases $2,500 or less are expensed.   There is no $200 rule I'm aware of.  

[wleighton]

Thank you both so much for taking the time to clarify so much for me. 

I think the de minimis safe harbor election is my best bet this year. And I assume I should select it for each schedule E that I complete for each different property that I own, even though I really only need to use it for this one. Will I still depreciate my vehicle expenses, or will those also then be considered regular expenses (under $2500) ?

The $200 rule I mentioned came from the IRS website:

"What is included in the definition of materials and supplies?

Materials and supplies are tangible, non-inventory property used and consumed in your operations including:

• Acquired components – Costs of components acquired to maintain, repair, or improve tangible property owned, leased, or serviced by you and that's not acquired as part of a larger item of tangible property; or
• Consumables – Costs of fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less, beginning when used in operations; or
• 12 month property – Costs of tangible property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in your operations; or
• $200 property – Costs of tangible property that has an acquisition cost or production cost of $200 or less.

The property need only fit into one of the above categories to qualify as a material or supply."

[Carl]

Will I still depreciate my vehicle expenses, or will those also then be considered regular expenses (under $2500) ?

Vehicle use for a rental is a completely different ball game. You deal with that in the Vehicle Expenses section. Since I seriously doubt the vehicle will be 100% business use, you have to use the per-mile method of deduction/depreciation. If you'll be spreading 1 vehicle across multiple rentals, you're begging for a never ending nightmare from which you will never awaken. Reporting the disposition of that vehicle in later years is going to give you permanent brain damage in the future. You'll also find that vehicle expenses is so minuscule compared to the other expenses, you'll wish you had never done it.

Consider yourself warned. 🙂

The $200 rule I mentioned came from the IRS website:

That has absolutely nothing to do with assets. It's talking about those things purchased and used to maintain or repair something, including an asset.

Example: you put a completely new central A/C in the house. That's gonna cost you around $5,000 or more. It also adds "real" value to the property. It gets capitalized and depreciated over time.

Three years later the fan motor burns out. You have a new fan motor installed at a cost of $500 for both the labor and the new motor. That's a repair expense. Replacing the fan motor does not in any way add value to the property. It simply maintains value by returning the A/C to it's designed and intended function prior to the event that caused it to no longer function the way it was designed and intended. If you did not fix the fan motor and were selling the property, there's no doubt you will get less money for the property with a non-functioning A/C.

[wleighton]

Carl,

Thank you for your input and for sharing your experience! I will skip the vehicle expenses as they are very insignificant. I had done it in past years, so now i'll have to figure out how to minimize the damage i've done without making it worse.

I was just referencing the $200 rule for supplies/tangibles that I had asked about early on in the thread. 

Thank you again!

[Carl]

@wleighton I think what will help you is some clear cut definitions. Here they are, minus the extraneous stuff about safe harbor.

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.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's 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 the very first time after your acquisition of the property, or the very first time after converting the property from personal use to rental use are not deductible.

Repair

Those expenses incurred to return the property or it's 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 the very first time after your acquisition of the property, or the very first time after converting the property from personal use to rental use , 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.