De Minimis Expenses for a Rental Property

[GGBJr]

I have two daughters who own a rental property.  Last year they had to replace two windows (less than $2,500 each),  replace a patio door (>$2,500), replace a dishwasher, and replace a microwave.  I  have read on this forum the various remarks concerning expensing versus improvements versus the de minimis expense route.  Can these items listed above be considered purchased property for de minimus expensing?  If so, is a separate listing of same required to be mailed  to the IRS, if one is e-filing the return?  What is the procedure for entering these expenses, if they so qualify, into Schedule E?

[MonikaK1]

 The IRS does allow the expensing of certain items up to $2,500 without having to depreciate them. TurboTax asks questions in the rental interview to help you identify which items to treat as assets subject to depreciation versus current-year expenses. You can enter them this way in TurboTax; you don't have to send anything separately to the IRS.

Rental property is considered a depreciable asset, as are major improvements such as new roofs, landscaping, refrigerators, water heaters, furniture, and so forth. Depreciation lets you deduct the "used up" part of an asset's cost year after year, until the entire cost is used up or you no longer own it. It provides for wear and tear or obsolescence of the property or asset.

Depreciation deducts the asset's cost over time rather than deducting it all at once, as you would when deducting an expense.

Expenses are used to deduct the entire cost of services, utilities, fees, and consumable items (like cleaning supplies, light bulbs, smoke alarms, and batteries).

See this TurboTax help article and this one for more information.

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 > Other expenses > Other Miscellaneous Expenses
• Enter Description (Safe Harbor ...) and amount (not entered as assets under this election)

Note:  Because you are under the $2,500 threshold, you are not required to used section 179.  You can list these expenses under Miscellaneous.  If the amount was over 2,500, then you would enter these as assets and then would be able to choose the 179 option.

• Maintain a complete record with your tax return should you need to verify these items at a later time, this should include your receipt.

To record this in TurboTax use the following steps.

1. When you come to the screen, under Assets (no you don't want to go directly to the asset summary) Did you buy any items that each cost $2,500 or less in 2020? 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 Asset Summary screen.  You have elected the De Minimis Safe Harbor provision.  
   1. Here's how to add your purchases that are $2,500 or less as Miscellaneous Expenses:
   2. Select Add Expense or Asset (may have to scroll ) if you have not already added Miscellaneous Expenses > Continue 
   3. Choose Other miscellaneous expenses.
   4. If you already have Miscellaneous Expenses then click Start or Update > Enter the description and amount 
   5. Or select Add another row to add description and amount

[MonikaK1]

 The IRS does allow the expensing of certain items up to $2,500 without having to depreciate them. TurboTax asks questions in the rental interview to help you identify which items to treat as assets subject to depreciation versus current-year expenses. You can enter them this way in TurboTax; you don't have to send anything separately to the IRS.

Rental property is considered a depreciable asset, as are major improvements such as new roofs, landscaping, refrigerators, water heaters, furniture, and so forth. Depreciation lets you deduct the "used up" part of an asset's cost year after year, until the entire cost is used up or you no longer own it. It provides for wear and tear or obsolescence of the property or asset.

Depreciation deducts the asset's cost over time rather than deducting it all at once, as you would when deducting an expense.

Expenses are used to deduct the entire cost of services, utilities, fees, and consumable items (like cleaning supplies, light bulbs, smoke alarms, and batteries).

See this TurboTax help article and this one for more information.

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 > Other expenses > Other Miscellaneous Expenses
• Enter Description (Safe Harbor ...) and amount (not entered as assets under this election)

Note:  Because you are under the $2,500 threshold, you are not required to used section 179.  You can list these expenses under Miscellaneous.  If the amount was over 2,500, then you would enter these as assets and then would be able to choose the 179 option.

[GGBJr]

I regret not having seen your post before today, since I had not received a message from TT.

Many thanks!

I am wondering whether I have a potential problem using DeMinimis on Schedule E.  Our two daughters jointly own the house, and they do a 50-50 split of all expenses.  In past years, when not using De Minimis, the Depreciation line (18a) refuses to split the $15,000 in depreciation expense.  The same amount appears in the third column from the left.  Hence, in past years, I have always entered depreciation expense on line 19a under Other Expenses, where TT does split the amount.  However, with De Minimis activated, is the IRS going to disallow the expense, because it is greater than $2,500?  Does the activation of De Minimis automatically treat all entries on line 19 to ensure that they are below the $2,500 threshold?  To get around this, must I split the depreciation expense on line 18a, thereby entering the same amount on both of the girls' Schedule Es?  Or, is there a TT problem on why the line 18a entry is not automatically split?

Thanks for your help, for sure!!

[DianeW777 · Accepted solution]

Line 18 should never have to be changed or split up. The depreciation should be calculated by entering half the cost of the rental on each daughter's return.  If this is corrected in the asset section of the rental on each return the correct depreciation will populate on each return, each year.

The DeMinimis Safe Harbor (DMSH) is not the only expense that can be listed on line 19. The fact the the sisters own the house 50/50 doesn't mean they can take double the $2,500 threshold. It's the same house and the same rental so if the expenses are greater than $2,500 then they must depreciate the assets. @MonikaK1 described in the detail the DMSH, which applies to assets, other than the building itself.

The other option, if there are capital improvements,  would be the Safe Harbor Election for Small Taxpayers 

• What can I depreciate or expense with the business safe harbor method?
• How do I handle capital improvements and depreciation for my rental?

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

• 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

 If you find you do qualify for this option and you want to take the full expense in one year for capital improvements, use the steps below to enter it in your return. Again, keep in mind this is one property, being divided by two taxpayers.

@GGBJr 

[GGBJr]

Thank you for the very rapid response.  Entering half the amount of total depreciation on each daughter's return will certainly work.  I think that you meant to say in the second sentence that total depreciation expense (as opposed to half the cost of the rental - presuming rental  income?) should be halved.  But, perhaps you were referencing half the cost of total depreciation on the rental property?

If there are other expenses which are greater than $2,500, I suppose that these should not be listed on line 19 (other expenses) when using De Minimis, since the De Minimis election would reject these?  If De Minimis were not elected, however, such charges possibly could appear on line 19?

Thanks again for your inciteful responses!

I have another question on the distribution of RMDs on my part-year New Jersey return that another tax expert was unable (or not available) to answer, but perhaps I should post my question again?

[DianeW777 · Accepted solution]

No, what I meant was to add an asset on each daughter's return for the house/land by using half the actual cost.  

• Example: House total cost is $50,000 (includes land of 10,000) half the cost would be 25,000 (includes 5,000 land)
• Add the asset to each daughter's return and each daughter will have the correct depreciation expense without any manual change to the return. This will also be easy to report the sale in the future on each daughter's return.

If you had expenses greater than the amount being used for DeMinimis Safe Harbor (DMSH) of $2,500, they can be entered on line 19 if allowed.

• Anything that has a longer than one year life is a depreciable asset (which is also available for DMSH) then it is placed on the rental as an asset. Examples would be appliances, lawn tractor, or other equipment used totally for rental purposes. An example of what expense you refer to would be helpful.  

You may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice).

Continue to watch your other question for your answer.  @GGBJr 

[GGBJr]

Now I am really becoming confused!  😎  These Schedule Es for both daughters were set up many years ago.  We have separate Excel spreadsheets for the property, including closing costs and year by year improvements.  We have never entered anything into TT, like the house as an asset.  We have a separate depreciation spreadsheet covering the 27.5 years of depreciation.  And, the annual gross figure has been entered on line 19, where TT splits the amount for us (a past discussion).  We also have entered on line 19 items like insurance (about $4,000), which TT splits for us.  This has worked well; never an audit (knock on the proverbial wood!).

I am wondering if DMSH is not for us. I have assumed that entering additional items under line 19 would enable us to add repair items, replaced appliances ($2,500 or less) and the like, which the IRS would ignore.  Maybe we should just skip DMSH and add repairs exceeding $2,500 to line 14 (Repairs) and replacement/repair charges under $2,500 on line 19.  My readings of DMSH have led me to believe that if it is elected for a return, the IRS pretty much ignores the line items on line 19, unless they exceed $2,500.  But, if it  is not elected, the IRS pretty much looks at everything.  I guess a little knowledge on our part is a dangerous thing!

You have been super helpful in guiding me through this maize.  It appears that my understanding of DMSH is a tad on the rusty side.

[DianeW777]

Do what feel is right for you in reference to the DMSH. 

As far as the depreciation of the house and any assets purchased over the years or any other equipment that has longer than a one year life, it's all right for you to keep a separate, outside of your tax return, spreadsheet.  Keep in mind you need those records until every item is disposed of by sale, trade or junked.  When any of those events occur, it will be a taxable event, treated like a sale.

@GGBJr