Expense (electing de minimis) or depreciate rental renovation costs?

[sunshine39]

I have read a number of posts here and articles online but am still unclear on what is acceptable. 

I did some renovations to the kitchen and bathrooms for a rental property.  It involved a lot of expenses costing less than $2,500 per receipt for things like light fixtures, tiles, faucets, mirrors, shower doors, toilets, etc.  The big ticket items costing more than $2,500 were for labor, cabinets and countertops.  A lot of the information I've seen online indicate to expense tangible items like appliances, but I have not been able to find information about  how to handle costs for other tangible items as mentioned that go into a renovation.

Can I expense all the items costing less than $2,500 per receipt  (via electing de minimis?) or must they be depreciated as a total cost of the renovation? 

Thank you very much to this community!

[M-MTax · Accepted solution]

You can use the safe harbor for amounts paid of $2500 or less.

[sunshine39]

Thank you!  Since we purchased almost all of the supplies for the renovations ourselves, there are many, many items with receipts under $2500.  Is there a higher likelihood of triggering red flags/audit if we claim about 40 items using safe harbor?  Even thought we have receipts for everything, we just want to avoid the hassle of dealing with the IRS.  Thanks again!

[Affordabletaxes2021]

It’s possible it could get pulled for a random review, but you’ve got the receipts to verify the purchases  and that the work was indeed done at the rental house. The IRS is very unpredictable these days as you’ll see by reading some of these posts. 

[M-MTax · Accepted solution]

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Is there a higher likelihood of triggering red flags/audit if we claim about 40 items using safe harbor?

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This may come as a surprise but you don't have a choice. If you use the de minimis safe harbor for any item or invoice of $2500 or less you have to do the same for ALL items or invoices of $2500 or less.

[sunshine39]

Thank you for clarifying.  Now, for the description of the items in TurboTax, would I elect "Rental Real Estate Property", and then "Appliances, Carpet, Furniture" for all the items?  Seems kind of odd, but the other choices don't seem to apply either for these non-appliance/carpet/furniture expenses.

[M-MTax · Accepted solution]

would I elect "Rental Real Estate Property", and then "Appliances, Carpet, Furniture"

No you would expense each item as a miscellaneous expense......OTHER on Line 19. You don't enter those items as assets.

[sunshine39]

Oh, wow.  I had it all wrong.  So only "appliances, carpet and furniture" expenses are recorded as assets and everything else less than $2500 related to the renovation are just recorded as expenses?  TurboTax generated a "Schedule E:  Supplemental Income and Loss -- Form 4562, Line 6 Additional Section 179 Property Statement" for the items I listed as an asset.    I am now so confused on how I should be reporting renovation expenses that are less than $2500 and those that are more than $2500.

[M-MTax · Accepted solution]

Items or invoices of $2500 or less can be reported as expenses....it's an election you make and it made applies to ALL items or invoices of $2500 or less.

[M-MTax · Accepted solution]

those that are more than $2500.

More than $2500 and you report them as assets that are capitalized and not expensed.

[sunshine39]

Got it.  Thank you!

[sunshine39 · Accepted solution]

Hello again! 

1)  Can you please confirm that the "Other" expenses should only include tangible items? 

2)  If yes, should all labor charges (even under $2500) be added to all the other tangible items (excluding appliances, carpets and furnishings) that cost more than $2500 for the renovation?

3)  Would it then be proper in TurboTax to select "Rental Real Estate Property" asset, category "Residential Rental Real Estate", and a description of "2024 Renovation" (for the item asking to "Describe the residential rental real estate"?   

Thanks again.  I'm getting there with all of your assistance!

[M-MTax · Accepted solution]

Don't select an asset category because those items are not listed as assets......they're expensed....deducted....on Sch E.

[M-MTax · Accepted solution]

You can add labor charges to tangible assets.

[M-MTax · Accepted solution]

Would it then be proper in TurboTax to select "Rental Real Estate Property" asset, category "Residential Rental Real Estate", and a description of "2024 Renovation" (for the item asking to "Describe the residential rental real estate"?   

If you have a large remodeling project you can add the total figure as one asset as residential real estate that would use the 27.5 year recovery period.