In previous articles, we discussed tax deductions for landlords and repairs vs. improvements. Today we‘ll offer insight into ‘safe harbors.‘ The IRS offers three variations, which can help landlords sidestep the “Is this a repair or an improvement issue.“
- Safe harbor for small taxpayers
- Safe harbor for routine maintenance
- De Minimis safe harbor
Safe Harbor for Small Taxpayers (SHST)
The SHST permits landlords to deduct all their annual expenses, including repairs and improvements, maintenance, and other costs, providing you meet the qualifications.
Hint: Small Taxpayers
In other words, this safe harbor is for landlords who meet three criteria:
1. Their average annual gross receipts for each of the last three years is no more than $10 million. (Note: gross receipts include your income from sales (rent) before deducting expenses, services, and investments.
2. There is also a property value limit of $1 million. This limit is on the unadjusted basis: the original cost (minus the land value) plus the value of improvements, and no, you don‘t get to deduct the annual depreciation amount. The limit applies to individual units. If you have more than one unit, the limit applies to each one separately. However, the more units you have, the more income you will produce. Even if all of your units are under the $10 million value, your annual income could potentially disqualify you.
3. The total amount of repairs, maintenance, and improvements for a unit must not exceed the lesser of $10,000 or 2% of the building’s adjusted basis –see b). This amount applies per building.
Finally, if your income doesn‘t disqualify you, then you could potentially have some properties that qualify for the safe harbor, based on b and/or c), while others do not.
Routine Maintenance Safe Harbor
When expenses qualify as routine maintenance –recurring actions needed to keep the unit in “operating“ mode (for example, annual furnace inspections, cleaning, and filters), they can be deducted in the same year. There is no limit on the cost of the maintenance. It covers both the service aspect – the inspection of the furnace, and replacement parts, such as a new fan motor. However, replacement parts are limited to items that generally are not expected to last more than ten years and don‘t increase the property value. For example, if you bought a rental property and purchased a new central air system, the system’s cost would be depreciated, but the servicing each year, incl. replacements of parts with a 10 yr. or less life span would be deductible in the same year you paid them.
De Minimis Safe Harbor
This ‘safe harbor‘ covers items that cost no more than $2500 –even if they are an improvement, rather than a repair. For example, if your rental property needs kitchen repair. In the process, you decide to purchase/install a new compact kitchen unit. The unit costs $2399.00. You hired a local handyman to install it for $1,000.00. You have two separate invoices, which are each under the $2500 limit. Even though they were an ‘improvement‘ rather than a repair, you can deduct both in the same year you incurred the expense instead of depreciating it. There are qualifications and limits:
Qualification: You must have an established accounting procedure in place, requiring it to expense amounts paid for property costing less than $2500. You must also follow through and process all those amounts and deductible expenses in your books. You cannot pick and choose which ones you will use.
Limits: You cannot deduct more than a total of $10,000 in one year‘s taxes.
We’ve shared this trilogy of “tax tips“ to make your rental property investments easier to manage. Please remember that our specialty is property management though, and you should always review your deductions with your accountant or tax professional before filing.
Meanwhile, if you need any assistance with your rental properties, the team at Rentals America stands ready. We offer a variety of services to help you succeed with your real estate investments.
About Rentals America
Rentals America provides full-service property management for residential rental properties. Our team is completely dedicated to property management and we’re here to help landlords navigate the rental market.
