Using de minimis Safe Harbor for a renovation

[Arturo]

The answer to your 1st question is 'no'.  the cost of the roof was under $10,000.  The answer to the second question is 'yes'.  my repair cost  was under2% of the unadjusted cost basis of the building.  Under that interpretation, I would qualify.  But the IRS rule reads "if the improvements exceed $10,000 or 2% of the adjusted basis, the expense does not qualify. Again my cost of the improvement/repair, is under $10,000, but  my  repair exceeds 2% of the unadjusted cost basis of the building.    I think you interpret the rule as being one or the other, but I think it means you have to meet both criteria.  From J.K. Lassers  2021tax guide there is an actual case where the tax court ruled that the landlord could deduct the full amount of the roof repair ($8,000)  because the repair merely restored the property to a leak free condition and did not add to the value of the property.   So there is another interpretation of the law.

I would appreciate your comments  

[DianeW777]

Per your words: But the IRS rule reads "if the improvements exceed $10,000 or 2% of the adjusted basis, the expense does not qualify. Again my cost of the improvement/repair, is under $10,000, but  my repair exceeds 2% of the unadjusted cost basis of the building.  

• Less than or equal to the smallest of .... so because your repair does exceed 2% of the unadjusted basis (original cost) of the building even if it is below $10,000 it would not qualify for Safe Harbor.
• 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)

[chaokps]

I renovated my rental single house last year and rented it out this year. the total costs of the materials was

$23,000.00 not including the labor costs. and I replaced the roof for $9500.00. how should I list that on Sch E?

should I  break it down like Painting; floor; tile and windows.  The rent income for last year was must less the the expense. How would the loss carry over to 2022?

[MarilynG1]

@chaokps Any improvements you do to the rental property AFTER it's a rental property can be listed as a Depreciable Asset in the rental asset section.

Click this link for more info on Rental Property Assets. 

[charjean47]

Hi Carl,   Like your detailed explanations.

[DianeW777]

Yes.  A fence does fall under what is considered capital improvements.  As you pointed out, in your case, it will add to the value of the home.

• Examples of exterior improvements include those made to roofs, landscaping, drive and walkways, storm doors and windows. Upgrading or installing sprinkler systems, a swimming pool or a fence are additional qualifying exterior improvements.

As long as your fence falls into the category explained by @Carl and myself earlier in this conversation.

If the improvements exceed $10,000 or 2% of the adjusted basis, the expense does not qualify.

Again if the cost of the fence, is under $10,000, but  cost of the fence exceeds 2% of the unadjusted cost basis of the building you would have to depreciate it.  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)

• @charjean47

[darcykl]

Hi, 

I rent out part of my home and sold it in 2020. I'm trying to determine if I should/can take the Safe Harbor Election for Small Taxpayers for my $2500+ improvements or if they just get calculated into the cost basis when I report the sale. In trying to figure out if I qualify for this election, I'm not sure what they mean by "gross receipts" here. The pop-up explanation in the desktop version of TurboTax says it refers to:

"your average annual gross receipts for the past three tax years, which need to be below or equal to $10,000,000 for this election."

and that

"Gross receipts include sales amounts for all rental or business activities. They are not reduced by cost of goods sold or business or rental expenses. Gross receipts also include wages, interest (including tax-exempt interest), dividends, royalties, annuities, Social Security income, pension or retirement plan distributions, and unemployment compensation."

So do they just mean receipts for the rental? Or when it says "wages" etc, do they mean I should include my personal wages (i.e. adjusted gross income)?

Thanks in advance for timely responses!

[DaveF1006]

This $10K threshold only applies if you have a business that is in the business of buying and/or selling goods and services. Doesn't apply to rental activities such as yours.