Cash in on Repair Rule Safe Harbors for Rental Property
Safe harbors in the IRS's tangible property regulations could help taxpayers sort out practical questions on how the rules apply to the rental of real property, presenters on a Tax Talk Today broadcast said.
Some of the difficulties arise when homeowners rent a part of their home, or taxpayers own only one or two rental properties, viewers calling in for help said.
Two of the safe harbors in the “repair rules” could help an owner of a rental property to expense certain items that might otherwise be capitalized, David W. Tolleth, president of the New Jersey Society of Enrolled Agents, said during the Oct. 27 broadcast.
The Internal Revenue Service's repair rules (T.D. 9636) describe how taxpayers can deduct or capitalize their expenses for maintaining, fixing and replacing tangible property, expanding a de minimis safe harbor for expensing certain costs and extending a routine maintenance safe harbor so that it applies to buildings (179 DTR GG-1, 9/16/13).
The first safe harbor relates to property acquisitions and allows landlords to designate property, such as a refrigerator or stove, as a year-end expense with no questions asked from the IRS, as long as the amount is less than $500.
“So it really is a safe harbor, there's an election for that on the tax return,” Tolleth said. “There's no harm in making the election. It's just a good idea to do, and gives you the opportunity to take this expense rather than capitalizing these items under $500.”
Another safe harbor is for materials and supplies, and allows taxpayers to expense, with no questions asked, those items under $200.
However, substantiation is key, said John Tuzynski, director of technical services in exam at IRS. Even though these are so-called de minimis regulations, having the substantiation will help if taxpayers are audited, he said.
Other provisions in the rules are also taxpayer-friendly in relation to rental properties, Mark Seid, manager of Seid & Co., a certified public accounting firm, said on the broadcast.
The first is a safe harbor for small taxpayers with buildings, but there are qualifications.
“We are allowed to take a deduction, and it's up to a $10,000 deduction on a current tax return. However, it must be a qualified building, which means that it must have an unadjusted basis of $1 million or less,” he said.
“Unadjusted basis means the basis of the property before thinking about depreciation. So it's effectively the original cost if it was acquired by purchase, and it is just the building, not the land,” Seid said.
The safe harbor applies if the total cost of acquisitions is the lesser of 2 percent of the unadjusted basis of the building or $10,000. If all of the costs the taxpayer incurs during the year are lower than both of those amounts, they can be taken as a current-year expense.
“That allows you to write off a lot of cost you may not have been able to in the past,” he said.
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