Using de minimis Safe Harbor for a renovation

[priorzeet]

Hi. I renovated my rental unit structure with one contractor. Then I painted the whole unit and replaced all flooring, including the renovation, with two more. If the paint and flooring were each less than $2,500 on separate invoices, can I claim them as de minimis or is the cost of the renovation included with the painting and carpet and therefore the cost to the unit is over $2,500? Thanks

[KennethB · Accepted solution]

The De Minimis safe harbor is the last safe harbor outlined by the final IRS regulations. Landlords can use this safe harbor to deduct low-cost personal property items used in their business. It does not matter if the item would be considered a repair or an improvement as long as the item costs less than $2,500. 

Yes, since the paint and flooring were each less than $2,500 and on separate invoices, you can elect the de minimis safe harbor.  See below for the IRS treatment of amounts in excess of the $2,500 amount.

Per the IRS "Tangible Property Regulations - Frequently Asked Questions" at the following link:  https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Ad...

Effective for taxable years beginning on or after January 1, 2016, the Internal Revenue Service in Notice 2015-82 increased the de minimis safe harbor threshold from $500 to $2500 per invoice or item for taxpayers without applicable financial statements. In addition, the IRS will provide audit protection to eligible businesses by not challenging the use of the $2,500 threshold for tax years ending before January 1, 2016 if the taxpayer otherwise satisfies the requirements of Treasury Regulation § 1.263(a)-1(f)(1)(ii).

If you use the de minimis safe harbor, do you have to capitalize all expenses that exceed the  $2,500 ($500 prior to 1-1-2016)  or $5,000 limitations?

No. Amounts paid for the acquisition or production of tangible property that exceed the safe harbor limitations aren't subject to the de minimis safe harbor election. Therefore, the safe harbor doesn't require you to capitalize all amounts paid for tangible property in excess of the applicable limitation. If an amount doesn't qualify under the de minimis safe harbor, you should treat the amount under the normal rules that apply, i.e., currently deductible if paid for incidental materials and supplies or for repair and maintenance. This treatment is proper regardless of whether the amount exceeds the applicable de minimis safe harbor limitation. The de minimis safe harbor is simply an administrative convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition or production of property that otherwise must be capitalized under the general rules.

[trapezewdc]

Question on de minimis safe harbor:
1. Can this be applied to appliances(like washer/dryer/microwave/range hood), furniture, repairs/maintenance, cleaning, electronics ?
2. Can this be applied to items not 100% used for biz ? Example: Appliances/furniture/electronics shared(say 50/50 equally) between renters and owners.
3. Can this be applied to expenses incurred in a prior year where there were no rental activities until the following year ? Example: Expenses incurred in 2017 and rental activities didn't start until 2018.
4. Can this be applied to above-mentioned 1/2/3 all-combined ?

[trapezewdc]

Another question. Roof work for 10000. But if I get "separate" invoices for this roof job where each invoice is less than 2500, does de minimis safe harbor still work ? In addition, what if these "separate" invoices are all dated with the same date ? Prompt answers are greatly appreciated.

[trapezewdc]

Still no answers after one year ?

[Carl]

So far, nothing mentioned in any post in this thread qualifies for the de-minimus safe harbor election. That's because everything mentioned in this thread becomes *A PHYSICAL PART OF* the property being rented. So regardless of it's cost, since it meets that criteria as well as the definition of a property improvement, you have no choice but to capitalize it and depreciate it over 27.5 years.

Section 162 of the Internal Revenue Code (IRC) allows you to deduct all the ordinary and necessary expenses you incur during the taxable year in carrying on your trade or business, including the costs of certain materials, supplies, repairs, and maintenance. However, section 263(a) of the IRC requires you to capitalize the costs of acquiring, producing, and improving tangible property, regardless of the size or the cost incurred.

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this 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 must 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 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.

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.

[tagteam]

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@trapezewdc wrote:

Still no answers after one year ?

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There are actually two "safe harbors" that may be elected. 

The first one has already been mentioned and it applies to certain tangible personal property up to $2,500 per invoice. That would include such items as stoves, refrigerators, washers/dryers, furniture, and like items.

The second safe harbor is the Safe Harbor Election for Small Taxpayers, which applies to certain improvements; the requirements for that are set forth below.

Safe Harbor Election for Small Taxpayers

You are not required to capitalize as an improvement, and therefore may be permitted to deduct, the costs of work performed on owned or leased buildings, e.g., repairs, maintenance, improvements or similar costs, that fall into the safe harbor election for small taxpayers. The requirements of the safe harbor election for small taxpayers are:

• Average annual gross receipts of $10 million or less; and
• Owns or leases building property with an unadjusted basis of less than $1 million or less; and
• The total amount paid during the taxable year for repairs, maintenance, improvements, or similar activities performed on such building property doesn't exceed the lesser of-
  • Two percent of the unadjusted basis of the eligible building property; or
  • $10,000 (for questions about how to calculate the unadjusted basis, refer to "Figuring the Unadjusted Basis of Your Property" in Publication 946.
• You make the election to use the safe harbor for each taxable year in which qualifying amounts are incurred.

[Bestvalue888]

Thanks for the info but I have a question on my situation as I got different answers so just want to check with you. My contractor charged me $1150 to replace my tenant ‘s old refrigerator ($1000 cost of the new refrigerator and $150 labor to set up).  I think I can use this Dr Minimis rule to claim $1150 as “expense” instead of depreciation for 5 years. Is that true? Thanks.

[DavidD66]

Yes, you can expense the cost of the refrigerator using the de minimis rule. 

[tagteam]

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@Bestvalue888 wrote:

I think I can use this Dr Minimis rule to claim $1150 as “expense” instead of depreciation for 5 years. Is that true?

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Yes, you can use the de minimis safe harbor for an appliance.

See https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Ad...

[Bestvalue888]

Awesome! Thanks so much!

[Bestvalue888]

Oh in fact, I also spent $600 new refrigerator for another tenant too (separate receipt and in separate rental property).  I can also claim it under the rule, as long as both of these items under $2500 total, correct? Thanks.

[Bestvalue888]

Thanks so much!

[Bestvalue888]

Oh in fact, I also spent $600 new refrigerator for another tenant too (separate receipt and in separate rental property).  I can also claim it under the rule, as long as both of these items under $2500 total, correct? Thanks.

[tagteam]

@Bestvalue888 That is correct.