Rental Real Estate (SFH) - how (should I) report Tenant Provided Improvements

[DumbDadLTG]

Hello,

My rental property lease required Tenant to sign up for and pay for local water softening service – it was a tank service (Our water is terrible on plumbing/appliances).  They will likely be long term (multiyear) tenant and asked me if they could instead have a water softener installed - if they supplied the water softener and paid for any necessary Plumbing modifications. I said yes (I'm now thinking for tax simplicity I should have sad no, but water under the bridge). They supplied Water softener and then I arranged for my plumber to do the work (he was already going to be onsite for an owner covered repair - so had him do work at same time - he provided separate invoice for water softener). I paid the plumber, then Tenant venmoed me to reimburse (~$500)…I asked them not to pay me via Avail rental collection service as figured that would really screw things up. Under this scenario, if tenant ever moved they could theoretically take the water softener with them, and I could either install an owner supplied softener, or have next tenant rent one from the Water Service Company.

But for now, I was curious if I need to report either or both tenant supplied items (equipment plus plumbing mod) as income? Since equipment can theoretically be removed I’m thinking I don’t need to report that, but plumbing mods might (?) be considered an upgrade. I’m leaning toward not reporting either, but would appreciate some TT input. This was all 2023. Many Thanks, E.

[TomK2023]

If your tenant pays any of your expenses, those payments are rental income. Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. 

The $500 paid to you is income.

IRS Pub. 527 - Residential Rental Property (page 4)

[DumbDadLTG]

Tom,

Thank you so much  - especially for the quick response and for the pinpointed IRS reference. Follow on question clarification. I was suspecting that  I might need to report the $500 as income. However, since the $500 Plumbing Contractor invoice/payment is for plumbing modifications (re-piping and additions that are permanently installed), is that technically an Improvement expense  (vs repair expense)  - that I would report as such (Improvement). I don't want to get in the weeds here, but would appreciate TT opinion that, even with that full disclosure, if there's still a reasonable argument to consider that as an expense  (repair or maintenance), as I know that's way cleaner tax wise - full deduction same year vs depreciation schedule, multiple years. But if the recommendation is to report as Improvement, just wanted to know. Thanks in advance for your further review/reply. E.

[DianeW777 · Accepted solution]

This can definitely be considered a repair due to the low cost to have the plumbing modified. It would not be considered a capital improvement at that amount.  You can safely add this to the rental activity as a repair expense.

There is also the DeMinimis Safe Harbor election that is available should you have any concern at all.

De Minimis Safe Harbor Election

This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off/deduct items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

• You don't have an applicable financial statement (most people don't).
• You have a consistent process for how you record expenses and assets.
• You record these items as expenses on your books/records.
• The cost of each item as shown on your receipt is $2,500 or less.
  • Rental Property select Edit >  Miscellaneous Expenses
  • Enter Description (Safe Harbor ...) and amount (not entered as assets under this election)

@DumbDadLTG 

[DumbDadLTG]

Perfect.

Thank you Diane (and again, Tom)

[DumbDadLTG]

Dianne (or others),

quick follow up question.

Regarding your 4th bullet. I'm in the step by step question format under "Rental Summary": "Expenses"  section. after entering standard expenses (the two back to back screens), there's a screen that pops up for "Misc expenses" - but I don't see any connectivity to the Safe Harbor.???

Then under "assets/depreciation" section, I DO encounter what appear to be safe harbor type questions. takes me to a screen that has the original "property assets" summary (from when I put this property into service 2021). There is an option to "add an asset". Is THIS where I put in these 2023 safe harbor "expenses"? (the previously mentioned $500 plumbing mod, plus a used refridg I provided ($75), and curtains I provided ($280).

Just tryinq to make sure I am accessing the correct question section of TT interview that will product the needed form.

also read some general community feedback that was suggesting that by taking Safe Harbor, that would prevent me from E-filing? That doesn't sound correct, (and I haven't gotten that far), but just checking that as well.

Thanks in advance for review/response.

[DumbDadLTG]

Hi Dianne,

I realized you may have not gotten notification of my follow up question because of the thread I responded to. Can you take a look and advise. It seems like adding the expenses in the asset item section (puts it in 179) seems to produce the referenced safe harbor form [1.263 (a)-(1f)] .....but wanted to double check

[DianeW777]

No, you will not see a connection in the expense section. You simply enter your description (safe harbor form [1.263 (a)-(1f)]) and the amount as Other expense. 

The questions are asked in the asset section and then when you say yes you are directed back to expenses (not assets).  Do not enter any safe harbor election expenses as an asset. This will not stop e-file.

Delete the asset you may have entered for the sale harbor expenses.

@DumbDadLTG