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boonas
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Rental Property

Rental property owned since 2004.  Have reported on Schedule E for years. This is the first time I've hired a contractor.  Tenant damaged kitchen.  He installed cabinets, floor, appliances, etc.  I, myself,  also did  painting, cleaning, etc. Cost is about $11,000 contractor labor plus his material costs of about $1,500. Rest of house was just sanding hardwood floors, replacing doors, etc., typical repairs/updates. For sanding the floors, a contractor cost about $2,000 and material costs of $400. Rest of house was just replacing doors, painting, etc., typical repairs/updates. So I have two things going on...contractor labor & costs and then other typical repairs/updates, supplies. How and what form(s) do I use to report the typical repairs/updates and the contractor work and kitchen renovation? 

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3 Replies

Rental Property

For starters, you cannot deduct the value of your own labor, only the cost of materials and supplies used for repairs would be deductible for the work you performed on the property.

 

You can treat the various updates, for which you used a contractor, as one remodel project and capitalize the cost over a 27.5 year period (the same as the underlying real estate).

 

Alternatively, if you have invoices for $2,500 or less, you can take advantage of the de minimis safe harbor election and expense the cost.

 

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

Rental Property

OK, let's first talk about repairs vs improvements.  A repair restores the property to as-was condition.  An improvement (sometimes called a betterment) adds to the value of the property, extends its useful life, or adapts it to a new use.  Repairs can be expensed, but improvements must generally be depreciated over 27.5 years.   Anything that is attached to the home (floor, cabinets) is a real property improvement (unless it is a repair.)

 

Also let's talk about assets.  Assets in this case applies to tangible items with an expected life of more than one year, that are not attached to the home.  This might be a new washer, dryer, refrigerator, stove, and so on.  Assets must normally be listed individually when you place them in service, and are depreciated over their usable life span.

 

Repairs, improvements and assets are treated differently on your tax return. 

 

It sounds like most of what you described except for the kitchen remodel was repairs (sanding the floors, painting, replacing a broken door).  Repairs are listed on line 14 of schedule E (but the program will do it for you, just list them as repairs.)

 

Assets are listed individually and are usually depreciated over the same 27.5 years. (But you list them individually because that helps you if they need to be replaced again before the 27.5 years is up.)  However, if you have items that are separately invoiced with a cost of $2500 or less, you can elect to treat them as expenses and deduct them all at once instead of depreciating them, this is called the tangible property safe harbor.   There may be times when it is actually better to take depreciation rather than the expense, but that is too complicated to go into here.  For items costing less than $2500 each, you can choose either treatment.

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

 

It sounds like remodeling the kitchen was more along the lines of an improvement, since you redid the whole thing, even though it was prompted by damage, the work sounds like an improvement rather than a simple repair.  The cost of improvements are depreciated over 27.5 years.  I don't believe the under $2500 safe harbor applies, because that is for tangible property, not real property (real estate).

 

However, there is a separate safe harbor for improvements to rental real estate called the Small Taxpayer Safe Harbor for Repairs and Improvements.  Under this provision, you can treat the improvement as an expense if you meet three tests.

a. The adjusted cost basis of the property is less than $1 million.

b. Your gross receipts as a landlord are less than $10 million per year.

c. The total cost of all repairs and improvements is not more than 2% of the adjusted cost basis of the property, or $10,000, whichever is less.

 

This means, if my math is right and the total cost was $15,000, the property needs to have a cost basis of more than $750,000 but less than $1 million to qualify.  So that may be out of reach.  If you don't qualify, the improvement gets depreciated.  

https://www.nolo.com/legal-encyclopedia/small-taxpayer-safe-harbor-for-repairs-improvements.html

 

Turbotax should know all these rules and help you out as you go.

Rental Property


@Opus 17 wrote:

.......that is for tangible property, not real property (real estate).


You should probably learn the proper terms because you're using them improperly.

 

The difference is not between real property and tangible property because real estate is actually tangible.

 

The distinction is between tangible property and intangible property and then real property (realty) and personal property (personalty). You're conflating those and that's an issue because even something permanently attached to the real property can be subject to the de minimis safe harbor election.

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