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de minimis safe harbor for rental property expenses
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JGE
Nov 30, 2022, 2:14:11 AM11/30/22
to
We purchased a vacation house in 2022, and started renting it - partly, in order to meet the IRS safe harbor for investment characterization of the replacement property in a 1031 like-kind exchange.
We are eligible to deduct $25,000 of passive real estate losses using the "special allowance for rental real estate activities with active participation" because our MAGI will be $100,000 (or not much more), so I'd like to expense as much stuff as possible on Schedule E.
It looks to me like we can take great advantage of the "de minimis safe harbor" and I want to make sure I understand it correctly. It appears that we can deduct any repairs, improvements, maintenance, etc, as long as their cost is shown on invoices that are $2500 or less. It also appears that if the invoice is itemized, we can expense single items on the invoice if they are less than $2500 (including a pro-rated share of shipping etc).
Do I understand this correctly ? We have only two improvements that cost over $2500, a new metal roof and an off-street parking space. Clearly those are improvements and cannot be expensed, and so must be declared as assets to be depreciated.
However, of the smaller items, some are also clearly improvements ($2000 for a radon mitigation system, and $1000 for a bear-proof trash receptacle, $3000+ for a minisplit heat pump). But since the radon and trash bin cost less than $2500, I can expense them, using de minimis. Even for the heat pump, though the entire DIY installation cost more than $2500, the unit itself is itemized on an invoice for about $2200. So I believe I can also expense this, along with the various installation components shown on that invoice and several others.
Do I have this right ? Can I literally expense everything except the roof and the parking space ?
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We are eligible to deduct $25,000 of passive real estate losses using the "special allowance for rental real estate activities with active participation" because our MAGI will be $100,000 (or not much more), so I'd like to expense as much stuff as possible on Schedule E.
It looks to me like we can take great advantage of the "de minimis safe harbor" and I want to make sure I understand it correctly. It appears that we can deduct any repairs, improvements, maintenance, etc, as long as their cost is shown on invoices that are $2500 or less. It also appears that if the invoice is itemized, we can expense single items on the invoice if they are less than $2500 (including a pro-rated share of shipping etc).
Do I understand this correctly ? We have only two improvements that cost over $2500, a new metal roof and an off-street parking space. Clearly those are improvements and cannot be expensed, and so must be declared as assets to be depreciated.
However, of the smaller items, some are also clearly improvements ($2000 for a radon mitigation system, and $1000 for a bear-proof trash receptacle, $3000+ for a minisplit heat pump). But since the radon and trash bin cost less than $2500, I can expense them, using de minimis. Even for the heat pump, though the entire DIY installation cost more than $2500, the unit itself is itemized on an invoice for about $2200. So I believe I can also expense this, along with the various installation components shown on that invoice and several others.
Do I have this right ? Can I literally expense everything except the roof and the parking space ?
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
Taxed and Spent
Nov 30, 2022, 10:44:15 AM11/30/22
to
On 11/29/2022 11:11 PM, JGE wrote:
> We purchased a vacation house in 2022, and started renting it - partly, in order to meet the IRS safe harbor for investment characterization of the replacement property in a 1031 like-kind exchange.
>
> We are eligible to deduct $25,000 of passive real estate losses using the "special allowance for rental real estate activities with active participation" because our MAGI will be $100,000 (or not much more), so I'd like to expense as much stuff as possible on Schedule E.
>
> It looks to me like we can take great advantage of the "de minimis safe harbor" and I want to make sure I understand it correctly. It appears that we can deduct any repairs, improvements, maintenance, etc, as long as their cost is shown on invoices that are $2500 or less. It also appears that if the invoice is itemized, we can expense single items on the invoice if they are less than $2500 (including a pro-rated share of shipping etc).
>
> Do I understand this correctly ? We have only two improvements that cost over $2500, a new metal roof and an off-street parking space. Clearly those are improvements and cannot be expensed, and so must be declared as assets to be depreciated.
>
> However, of the smaller items, some are also clearly improvements ($2000 for a radon mitigation system, and $1000 for a bear-proof trash receptacle, $3000+ for a minisplit heat pump). But since the radon and trash bin cost less than $2500, I can expense them, using de minimis. Even for the heat pump, though the entire DIY installation cost more than $2500, the unit itself is itemized on an invoice for about $2200. So I believe I can also expense this, along with the various installation components shown on that invoice and several others.
>
> Do I have this right ? Can I literally expense everything except the roof and the parking space ?
>
The roof may be an expense, if it is just replacing the roof membrane.
> We purchased a vacation house in 2022, and started renting it - partly, in order to meet the IRS safe harbor for investment characterization of the replacement property in a 1031 like-kind exchange.
>
> We are eligible to deduct $25,000 of passive real estate losses using the "special allowance for rental real estate activities with active participation" because our MAGI will be $100,000 (or not much more), so I'd like to expense as much stuff as possible on Schedule E.
>
> It looks to me like we can take great advantage of the "de minimis safe harbor" and I want to make sure I understand it correctly. It appears that we can deduct any repairs, improvements, maintenance, etc, as long as their cost is shown on invoices that are $2500 or less. It also appears that if the invoice is itemized, we can expense single items on the invoice if they are less than $2500 (including a pro-rated share of shipping etc).
>
> Do I understand this correctly ? We have only two improvements that cost over $2500, a new metal roof and an off-street parking space. Clearly those are improvements and cannot be expensed, and so must be declared as assets to be depreciated.
>
> However, of the smaller items, some are also clearly improvements ($2000 for a radon mitigation system, and $1000 for a bear-proof trash receptacle, $3000+ for a minisplit heat pump). But since the radon and trash bin cost less than $2500, I can expense them, using de minimis. Even for the heat pump, though the entire DIY installation cost more than $2500, the unit itself is itemized on an invoice for about $2200. So I believe I can also expense this, along with the various installation components shown on that invoice and several others.
>
> Do I have this right ? Can I literally expense everything except the roof and the parking space ?
>
That would be a repair, not an "improvement". There are tax court cases
on this issues, and the IRS has relented and now follows the statute.
Is the off street parking space a new space, or repairs to an existing
space?
Keep in mind a safe harbor is just that. It does not mean a repair (not
an improvement) greater than the safe harbor limit cannot be deducted as
an expense.
JGE
Nov 30, 2022, 5:49:17 PM11/30/22
to
On Wednesday, November 30, 2022 at 10:44:15 AM UTC-5, Taxed and Spent wrote:
> On 11/29/2022 11:11 PM, JGE wrote:
> > We purchased a vacation house in 2022, and started renting it - partly, in order to meet the IRS safe harbor for investment characterization of the replacement property in a 1031 like-kind exchange.
> >
> > We are eligible to deduct $25,000 of passive real estate losses using the "special allowance for rental real estate activities with active participation" because our MAGI will be $100,000 (or not much more), so I'd like to expense as much stuff as possible on Schedule E.
> >
> > It looks to me like we can take great advantage of the "de minimis safe harbor" and I want to make sure I understand it correctly. It appears that we can deduct any repairs, improvements, maintenance, etc, as long as their cost is shown on invoices that are $2500 or less. It also appears that if the invoice is itemized, we can expense single items on the invoice if they are less than $2500 (including a pro-rated share of shipping etc).
> >
> > Do I understand this correctly ? We have only two improvements that cost over $2500, a new metal roof and an off-street parking space. Clearly those are improvements and cannot be expensed, and so must be declared as assets to be depreciated.
> >
> > However, of the smaller items, some are also clearly improvements ($2000 for a radon mitigation system, and $1000 for a bear-proof trash receptacle, $3000+ for a minisplit heat pump). But since the radon and trash bin cost less than $2500, I can expense them, using de minimis. Even for the heat pump, though the entire DIY installation cost more than $2500, the unit itself is itemized on an invoice for about $2200. So I believe I can also expense this, along with the various installation components shown on that invoice and several others.
> >
> > Do I have this right ? Can I literally expense everything except the roof and the parking space ?
> >
> The roof may be an expense, if it is just replacing the roof membrane.
> That would be a repair, not an "improvement". There are tax court cases
> on this issues, and the IRS has relented and now follows the statute.
>
> Is the off street parking space a new space, or repairs to an existing
> space?
>
> Keep in mind a safe harbor is just that. It does not mean a repair (not
> an improvement) greater than the safe harbor limit cannot be deducted as
> an expense.
Roof was metal replacing shingles, so I think a "betterment" and thus an improvement, IIRC. Parking space was a new one (mountain house, so driveway is extremely steep, some cars couldn't make it, esp. w/ snow & ice).
> On 11/29/2022 11:11 PM, JGE wrote:
> > We purchased a vacation house in 2022, and started renting it - partly, in order to meet the IRS safe harbor for investment characterization of the replacement property in a 1031 like-kind exchange.
> >
> > We are eligible to deduct $25,000 of passive real estate losses using the "special allowance for rental real estate activities with active participation" because our MAGI will be $100,000 (or not much more), so I'd like to expense as much stuff as possible on Schedule E.
> >
> > It looks to me like we can take great advantage of the "de minimis safe harbor" and I want to make sure I understand it correctly. It appears that we can deduct any repairs, improvements, maintenance, etc, as long as their cost is shown on invoices that are $2500 or less. It also appears that if the invoice is itemized, we can expense single items on the invoice if they are less than $2500 (including a pro-rated share of shipping etc).
> >
> > Do I understand this correctly ? We have only two improvements that cost over $2500, a new metal roof and an off-street parking space. Clearly those are improvements and cannot be expensed, and so must be declared as assets to be depreciated.
> >
> > However, of the smaller items, some are also clearly improvements ($2000 for a radon mitigation system, and $1000 for a bear-proof trash receptacle, $3000+ for a minisplit heat pump). But since the radon and trash bin cost less than $2500, I can expense them, using de minimis. Even for the heat pump, though the entire DIY installation cost more than $2500, the unit itself is itemized on an invoice for about $2200. So I believe I can also expense this, along with the various installation components shown on that invoice and several others.
> >
> > Do I have this right ? Can I literally expense everything except the roof and the parking space ?
> >
> The roof may be an expense, if it is just replacing the roof membrane.
> That would be a repair, not an "improvement". There are tax court cases
> on this issues, and the IRS has relented and now follows the statute.
>
> Is the off street parking space a new space, or repairs to an existing
> space?
>
> Keep in mind a safe harbor is just that. It does not mean a repair (not
> an improvement) greater than the safe harbor limit cannot be deducted as
> an expense.
I don't mind depreciating those two items; not that much to keep track of, and I think I'll hit the maximum deductible $25K passive loss without expensing those (and our MAGI, not including Social Security benefits, should be no more than $100K).
I just want to make sure I can deduct EVERYTHING that costs less than $2500 (even as an item on an invoice), without worrying if it's an expense or an improvement. Seems almost too good to be true.
Richard Di Bernardo, CPA
Feb 1, 2023, 3:44:31 AM2/1/23
to
On Wednesday, November 30, 2022 at 2:49:17 PM UTC-8, JGE wrote:
> On Wednesday, November 30, 2022 at 10:44:15 AM UTC-5, Taxed and Spent wrote:
> > On 11/29/2022 11:11 PM, JGE wrote:
> > > We purchased a vacation house in 2022, and started renting it - partly, in order to meet the IRS safe harbor for investment characterization of the replacement property in a 1031 like-kind exchange.
> > >
> > > We are eligible to deduct $25,000 of passive real estate losses using the "special allowance for rental real estate activities with active participation" because our MAGI will be $100,000 (or not much more), so I'd like to expense as much stuff as possible on Schedule E.
> > >
> > > It looks to me like we can take great advantage of the "de minimis safe harbor" and I want to make sure I understand it correctly. It appears that we can deduct any repairs, improvements, maintenance, etc, as long as their cost is shown on invoices that are $2500 or less. It also appears that if the invoice is itemized, we can expense single items on the invoice if they are less than $2500 (including a pro-rated share of shipping etc).
> > >
> > > Do I understand this correctly ? We have only two improvements that cost over $2500, a new metal roof and an off-street parking space. Clearly those are improvements and cannot be expensed, and so must be declared as assets to be depreciated.
> > >
> > > However, of the smaller items, some are also clearly improvements ($2000 for a radon mitigation system, and $1000 for a bear-proof trash receptacle, $3000+ for a minisplit heat pump). But since the radon and trash bin cost less than $2500, I can expense them, using de minimis. Even for the heat pump, though the entire DIY installation cost more than $2500, the unit itself is itemized on an invoice for about $2200. So I believe I can also expense this, along with the various installation components shown on that invoice and several others.
> > >
> > > Do I have this right ? Can I literally expense everything except the roof and the parking space ?
> > >
> > The roof may be an expense, if it is just replacing the roof membrane.
> > That would be a repair, not an "improvement". There are tax court cases
> > on this issues, and the IRS has relented and now follows the statute.
> >
> > Is the off street parking space a new space, or repairs to an existing
> > space?
> >
> > Keep in mind a safe harbor is just that. It does not mean a repair (not
> > an improvement) greater than the safe harbor limit cannot be deducted as
> > an expense.
> Roof was metal replacing shingles, so I think a "betterment" and thus an improvement, IIRC. Parking space was a new one (mountain house, so driveway is extremely steep, some cars couldn't make it, esp. w/ snow & ice).
>
> I don't mind depreciating those two items; not that much to keep track of, and I think I'll hit the maximum deductible $25K passive loss without expensing those (and our MAGI, not including Social Security benefits, should be no more than $100K).
>
> I just want to make sure I can deduct EVERYTHING that costs less than $2500 (even as an item on an invoice), without worrying if it's an expense or an improvement. Seems almost too good to be true.
Do a cost segregation study. The parking space would be a land improvement, eligible for 100% bonus depreciation.
> On Wednesday, November 30, 2022 at 10:44:15 AM UTC-5, Taxed and Spent wrote:
> > On 11/29/2022 11:11 PM, JGE wrote:
> > > We purchased a vacation house in 2022, and started renting it - partly, in order to meet the IRS safe harbor for investment characterization of the replacement property in a 1031 like-kind exchange.
> > >
> > > We are eligible to deduct $25,000 of passive real estate losses using the "special allowance for rental real estate activities with active participation" because our MAGI will be $100,000 (or not much more), so I'd like to expense as much stuff as possible on Schedule E.
> > >
> > > It looks to me like we can take great advantage of the "de minimis safe harbor" and I want to make sure I understand it correctly. It appears that we can deduct any repairs, improvements, maintenance, etc, as long as their cost is shown on invoices that are $2500 or less. It also appears that if the invoice is itemized, we can expense single items on the invoice if they are less than $2500 (including a pro-rated share of shipping etc).
> > >
> > > Do I understand this correctly ? We have only two improvements that cost over $2500, a new metal roof and an off-street parking space. Clearly those are improvements and cannot be expensed, and so must be declared as assets to be depreciated.
> > >
> > > However, of the smaller items, some are also clearly improvements ($2000 for a radon mitigation system, and $1000 for a bear-proof trash receptacle, $3000+ for a minisplit heat pump). But since the radon and trash bin cost less than $2500, I can expense them, using de minimis. Even for the heat pump, though the entire DIY installation cost more than $2500, the unit itself is itemized on an invoice for about $2200. So I believe I can also expense this, along with the various installation components shown on that invoice and several others.
> > >
> > > Do I have this right ? Can I literally expense everything except the roof and the parking space ?
> > >
> > The roof may be an expense, if it is just replacing the roof membrane.
> > That would be a repair, not an "improvement". There are tax court cases
> > on this issues, and the IRS has relented and now follows the statute.
> >
> > Is the off street parking space a new space, or repairs to an existing
> > space?
> >
> > Keep in mind a safe harbor is just that. It does not mean a repair (not
> > an improvement) greater than the safe harbor limit cannot be deducted as
> > an expense.
> Roof was metal replacing shingles, so I think a "betterment" and thus an improvement, IIRC. Parking space was a new one (mountain house, so driveway is extremely steep, some cars couldn't make it, esp. w/ snow & ice).
>
> I don't mind depreciating those two items; not that much to keep track of, and I think I'll hit the maximum deductible $25K passive loss without expensing those (and our MAGI, not including Social Security benefits, should be no more than $100K).
>
> I just want to make sure I can deduct EVERYTHING that costs less than $2500 (even as an item on an invoice), without worrying if it's an expense or an improvement. Seems almost too good to be true.
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