De Minimus Safe Harbor

Forum|Forum|4 years ago
March 10, 2022
2 replies
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I am a landlord with 8 units and I am interesting in taking the DMSH for some of my normally depreciable items... I have read extensively on the subject and felt good about the criteria and guidelines and understood everything fairly well until I started reading everyone's opinion on the subject here in the TT threads. One issue I am not understanding is why in the threads here about DMSH many say you can't take the election with improvements. I do not see that when I read the IRS information about the election. I dont think the word improvements is even used under the topic. And then it is said that you should use the Safe Harbor Election for Small Taxpayers for improvements which I agree with but I don't qualify for that election so that is a no go for me. I did an extensive remodel on 3 units (over 100K) and will also have significant depreciation items that are over the $2500 limit. So what are examples that are a big no-no to take under the election that would be related to a remodel? What I am looking at for the election is the supplies i used for the improvements.... those are the low dollar receipts and there are many!! Some examples would be tiles, faucets, bathroom vanities, lighting, window treatments, bathtubs, sinks, appliances.. anything you can think of that would go with a total remodel. The labor for the improvements will be depreciated as it is near 80k and things like granite countertops, HVAC,...............

Any polite/constructive comment or discussion on the above would be greatly appreciated and welcomed!

Thanks

DianeW777

The deminimis safe harbor works in two different ways. Once for personal property (assets that are not real estate) and then for capital improvements to real estate. I will supply the information for both.

Personal Property:

If the amount is $2,500 or less then you may be able to directly expense this under miscellaneous deductions on the business or rental using the DeMinimis Safe Harbor rules.

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.

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)

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birdieblue

What can I do if the De Minimis Safe Harbor election isn’t in my return? I’m using turbo tax premium and I’m reporting income/expenses for a condo i rent out on schedule E. I’m pretty sure I said in the interview process I wanted to elect the safe harbor, but I can’t find that I the interview process when I go back to check. And when I previewed the return before filing, I saw there is no election in the return. I bought kitchen appliances for the condo for less than $2500 that qualify for the safe harbor if I make the election. But if there is no election form, I wouldn’t want the IRS to require me to capitalize if audited. How can I add the election before I e-file?

mglauner

Go back to the Rental Assets section and Edit.

The first screen will ask if you want to review your Election choices, so choose Yes.

The next screen asks about your election (though it doesn't specifically say 'Safe Harbor'). Click the election link to learn more.

Here's more discussion on the Safe Harbor Election.

@birdieblue

AmeliesUncle

The 'improvement' (including cost of labor) is one item. So if the entire 'improvement' is over $2500, it would need to be depreciated.

pnoredAuthor

@DianeW777 Thank you for your reply. I do not qualify for the DMSH for Small Taxpayers so I will be keeping the discussion to just DMSH. If I am understanding correctly, the only part of my remodel (improvement) that I can claim under the DMSH election would be the new appliances (personal property). All of the items that one typically thinks of for a remodel, like sinks, tubs, vanities, tiles, flooring, cabinet hardware, plumbing fixtures, light fixtures, etc will need to be capitalized anddepreciated along with the labor cost?

I read on a CPA websites where they used this example for applying the DMSH:

For example, a taxpayer replaces 100 windows in a property that has 150 windows at a cost of $2,000/window. This taxpayer, applying the facts and circumstances and considering the unit of property, has replaced a significant portion (100/150 or 66%) of the windows and would generally be required to capitalize the costs. If the taxpayer elected the de minimis safe harbor, it could deduct 200,000 immediately (100 x $2,000) and not have to capitalize the costs.

I have also read very similar comments on other blogs and websites written by CPA's. (i try to make sure it is someone who should know tax law) This seems to directly conflict the information you provided for the DMSH election because to me windows are not personal property, they are an improvement. But they seem to be saying you can elect DMSH in their example.

This is why I am so confused at this point. It seems to me some are interpreting the election one and others another way.