Annual Elections: What is an "Item" versus an "Improvement". De Minimis Safe Harbor versus the $200 rule?

[tagteam]

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@Michael_NC wrote:

It would seem to be easier to enter the total as part of the Supplies.

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It is just my opinion, but that approach appears to be the better one and less of a hassle (it is the one I use and have been using for years without any issues).

[tol]

I have the same question.  However, when reading through the answers, I'm concerned the answers miss 2 points.  1).  DST investments are passive, so are not a "business", and 2) taxpayers usually own a small % of the DST.  

Let's use a 1% ownership as an example:  I understood the $2500 limit is per invoice.  So if the DST statement shows $87, that means the item was $8,700.  So, does the $2500 apply to the 1% of $87 or the invoice amount for the DST of $8,700. 

Since DST investments are passive, can the $200 limit apply since the investment is NOT considered a business ?

[dgru565662]

I need some clarification on this also.  I have a rental and share ownership with another family member and we each file our own return.   Income and expenses are shared equally. and reported on the Schedule E.   This year my actual part of the improvements/maintenance/repair expenses are under the 2% of the Unadjusted basis of the building, and I would like to use the small harbor for small taxpayers election   I would greatly benefit with the deduction this year, he prefers to capitalize his portion.  Can I do this?

I have searched and searched and found no real definitive answer anywhere in the IRS rules.  

[tagteam]

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@tol wrote:

So, does the $2500 apply to the 1% of $87 or the invoice amount for the DST of $8,700. 

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I believe that would be the invoice amount, regardless.

Thus, in that case the $8,700 is far over the limit.

[Think57]

Hello TOL.  I find these tax terms and definitions confusing, as the tax world has its own semantics and definitions.  I look as a DST investment as a "passive investment in a business".  It is a business in that we have to fill out a Schedule E for.  And according to the tax rules, a DST investment is a passive activity. 

I only use the De Minimis Safe Harbor election when the income statement from the DST sponsor lists out expenses as meeting the De Minimis Safe Harbor criteria.

I expense items and improvements $200 or less because Turbo Tax offers that as an option.  Turbo Tax knows that this Schedule E activity is a passive activity, so trusting that Turbo Tax is correctly offering this option versus depreciating the item or improvement.

To keep things simple, for items and improvements where our portion is greater than $200 per the financials from the DST sponsor, am not using the Section 179 or the Special Depreciation Allowance options, even though Turbo Tax offers them as options versus depreciating the asset.  Seems things get tricky when the passive activity has a loss and the expensing of the asset using Section 179 or Special Depreciation Allowance options gets caught up in the passive activity limitations tax rules and carry-forward of passive activity loss rules.