Rental remodel and repair; Figuring out what I can de minimus expense, what can be depreciated at 5-year, and what I should combine into a total for a 27.5 year mprovement.

[RoyV]

Hi.  The following is for a rental condo I own that I spent about $15,000 on between tenants last summer.

            I had new kitchen-cabinets/countertop installed, did a lot of repairs in the unit, had new flooring installed, and bought some new appliances.  There are about 100 receipts all less than $2500 (various purchases from different stores and contractors).  I was thinking of grouping all flooring materials/labor together and consider that 27.5-year depreciation.  Same with kitchen cabinets/countertops materials and labor.   But it seems like I would be doing myself a disservice if I didn't separate the stove and refrigerator out of the receipts to either de-minimus expense or depreciate (with special depreciation option) at a 5-year rate.   Would you agree that I...

1.  Should not separate out costs of flooring, sink, cabinet boxes, etc. as de minimus expenses and instead treat as a subtotal to the total cost of the improvement (flooring and cabinet improvements) at 27.5 year real estate property depreciation?

2.  Could separate out some goods bought (e.g., appliances)?

3. For question 2, if I can separate those appliances from the kithen cabinet improvement could I then use de minimus expensing (adhering to proper de minimus criteria) instead of adding it as an asset (appliance, 5-year depreciation)?

[DianeW777]

You are correct.  The appliances should be separated out and depreciated over five years instead of 27.5 years for the remodeling/capital improvements.

1. What can you use as a DeMinimis Safe Harbor expense? (See below.)
2. Yes, and 
3. Yes.

Improvements Election

This election is an option you can take each year that lets you write off some building improvements as expenses instead of assets.

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)

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2021? mark the Yes button and click Continue. 
2. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
3. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less. 
4. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision. 
5. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2021?
6. If you say Yes, you will be taken through the screens for the Improvements election.
7. If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets. 
8. On the Rental Summary screen go to the Expenses section and click on the Start/Update box. 
9. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished
10. Continue to complete your entries

[RoyV]

Great help, thanks.  So I take it the reply to question 3 is actually no for appliances....since it is advised to depreciation them at 5 year.

[DawnC]

If you do not use the Safe Harbor election, the appliances are depreciated over 5 years.   The De Minimis Safe Harbor election lets you deduct the full cost of items worth $2,500 or less, instead of depreciating.  

What can I expense or depreciate with the business safe harbor election?   This link also has instructions.  

[RoyV]

Thank you.   When I saw the screen read  "When you come to the screen, Did you buy any items that each cost $2,500 or less in 2021? mark the Yes button and click Continue. "  ....I am now thinking this is an option to not treat a $8,000 cabinet remodel as an improvement since all my receipts for this were less than $2,500.  It seems from the language that I can use de minimis safe harbor for the whole remodel and I need to itemize all these as miscellaneous expenses.  This will give me a big loss for the year on the rental unit but it seems like this is an option to me.  Any thoughts?

[RobertB4444 · Accepted solution]

@RoyV  You have to look at your long term tax picture.  You can take the big deduction for this year and it will greatly improve this year's tax position.  But it adds nothing to the basis of the property and does not give you any future deductions.  If you are certain that you aren't selling anytime soon (so the basis of the improvements wouldn't help since they would be fully depreciated anyway) and you don't feel like the additional deduction will be more helpful in the next five years then go ahead and take it now.  

[RoyV]

Thanks Robert!

 I may sell in a year or two but if I can offset ordinary income now vs the same capital gain in a year (due to the added basis of the 27.5 year improvement).....wouldn't it be better to choose the same dollar amount of offsetting ordinary income if my income bracket is higher than the long term capital gain rate?  And time value of money....isn't it better to have it offset income now vs spreading out over 27.5 years?  I am asking just to see if there is anything big I am missing.   Thanks. Roy 

[RobertB4444]

No @RoyV, you're not missing anything.  As long as your income is low enough that you are allowed to take the losses now instead of carrying them over then offsetting your regular tax rate is always going to be better than offsetting capital gains.