Depreciate or expense rental Renovations?

[mikemarq]

In 2020 we put over $20k in repairs and improvements.  Cabinets, sinks, flooring, paint, door handles, etc.  Seems like the law now allows us to take items that would normally be depreciated and expense them in the same year.  Do we need to expense some items and depreciate some items -and/or- carry forward a loss?  We plan to sell next year (July 2022).  We just learned that there is a special assessment for roof replacement ($7300!!) due April 1 2021 so next year will already be a loss.

I don't want to leave $$ on the table knowing we will be selling next year.

We've owned and rented the condo since 2004. 

Many Thanks!! Mike.

[DianeW777]

There is a special DeMinimus Safe Harbor that allows for full expense deduction for capital improvements if you meet the criteria. I will add the information below.

Next, the information about the Special Depreciation expensing your roof can be found at the IRS TCJA New Expensing page for property placed in service after 2017.

Improvements Election - This is a special expense election, no asset listed for depreciation if you qualify.

This election is an option you can take each year that lets you write off some building improvements as expenses instead of assets. Here are the rules you need to meet to take this election:

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits: 
  • 2% of the unadjusted basis of your building or
  • $10,000

This election for building improvements is called the Safe Harbor Election for Small Taxpayers. If you decide to take this option, a form called Safe Harbor Election for Small Taxpayers will show up in your tax return. This election will apply to all your businesses, rental properties or farms. (IRS Tangible Property FAQs)

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2020? mark the Yes button and click Continue. 
2. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
3. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less. 
4. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision. 
5. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2020?
6. If you say Yes, you will be taken through the screens for the Improvements election.
7. If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets. 
8. On the Rental Summary screen go to the Expenses section and click on the Start/Update box. 
9. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished. 

Keep a log of any expense using this method.

[Carl]

n 2020 we put over $20k in repairs and improvements.

Understand that it is not common for rental property to have a taxable gain on paper each year. Especially if you have a mortgage on the property. Additionally, your passive rental expenses can only be deducted from your passive rental income. Once those expenses get the taxable rental income to zero, that's it. Any remaining loss is carried over.

But there is an allowance for a maximum of $25K to be deducted from other ordinary income each year, if you qualify. But of course, you've got to meet the criteria, and you must have the "other taxable income" to deduct it from.

So if "before" you figure in the costs of improvements, you have already met your maximum, using the de-minimus election just flat out will not help you at all on your tax liability for 2020. The loss just gets carried forward, where it may or may not help in a future tax year. Also, not all improvements qualify for the de-minimus election.

Basically, depending on how and when things were done, you may be able to (and find it simpler to) classify everything as a property improvement. For example, replacing the kitchen cabinets and new floors would be a property improvement. If at the same time you replaced that broken door knob (a repair) just include it in the cost of the improvement since it was "a part of" the same update/upgrade project.

Property improvements are capitalized and depreciated over time. They get entered in the Assets/Depreciation section of the program.

Do we need to expense some items and depreciate some items -and/or- carry forward a loss?

If you plan to sell in the next year or two, I would capitalize all I can, since it adds to the cost basis and the depreciation recapture on those improvements for a mere two years would be minimal. But before making that my final decision, I would look at the total of all depreciation already taken on the property. (Assuming that I actually have a choice to take the safe harbor election.)