Looking for a Second Opinion from Tax Pros

[Kate McClinton]

I'm second guessing some answers my CPA gave me recently and wanted to run the following questions by others who specialize in real estate accounting.  Thanks so much for your time!

We purchased a house, listed it for rent a few days after closing, and had the following work done:

Painting (interior of house) - $4,220
Plumbing and electrical work - $1,603
Countertops - $2,130
Flooring - $5,800
Garage Door - $850

1.)  Is it permissible to use the de minimis safe harbor election and expense the renovation costs that fall below $2,500 instead of capitalize them?

2.)  Is the house considered “placed in service” on the day it was listed for rent?

3.)  When calculating the cost basis of a home, is it permissible to use the allocation of building to land from the county property tax assessment instead of an appraisal?  Our CPA said we had to use the appraisal as it is more accurate.

4.)  Our CPA has been depreciating new appliance purchases from all of our rental properties instead of expensing them in the current year using the de minimis safe harbor election.  When asked, she said she didn’t think it would make much of a difference and would likely cost us more in professional fees for her to use that election.  Does this sound right to you?

Thanks so much for your input!

[Linda Weygant]

1.) Is it permissible to use the de minimis safe harbor election and expense the renovation costs that fall below $2,500 instead of capitalize them?

2.) Is the house considered “placed in service” on the day it was listed for rent?

No, despite the BP blog post that seems to indicate that advertising is some kind of magic bullet.  It's not.  In order to be considered "In Service", the dwelling must be ready and available to rent.  In other words, if somebody qualified came up and knocked on the door, could they move in the next day?  Odds are good that if you're doing flooring, the answer is No.  If there is no running water in the kitchen because you've got the countertops torn apart, then you do not have a habitable home (by most county standards).  Therefore, your asset is not In Service and De Minimus Safe Harbor would not apply.

3.) When calculating the cost basis of a home, is it permissible to use the allocation of building to land from the county property tax assessment instead of an appraisal? Our CPA said we had to use the appraisal as it is more accurate.

Yes, it's permissible if no other more accurate allocation is available.  I use the following in order of preference:

1.  Appraisal (including insurance appraisals/valuations).

2.  Survey (if it includes a valuation)

3.  Property Tax assessment from the county (where available)

4.  If none of those are available, I will sometimes use a percent of building footprint vs total lot measurement

5.  Gut feel if nothing else is available (but documented as to how I arrived there).

4.) Our CPA has been depreciating new appliance purchases from all of our rental properties instead of expensing them in the current year using the de minimis safe harbor election. When asked, she said she didn’t think it would make much of a difference and would likely cost us more in professional fees for her to use that election. Does this sound right to you?

Appliances are not eligible for De Minimus Safe Harbor.  They are a completely separate Asset Class (Equipment) vs Building/Improvements.  They are eligible for Bonus depreciation at 50% in the first year and then depreciated thereafter.  Starting in September 2017, the bonus depreciation is at 100%.  However, just because your CPA is not maximizing your equipment depreciation, that does not necessarily mean they are wrong.  Depreciation elections are based on a whole list of items such as projected future passive income, current level of other earnings, anticipated exit date (if you've shared that), etc.

Her reasoning of "more in professional fees" makes no sense.  In my software, it's literally a button click and a confirmation.  Even though it prints out on a separate page, I don't charge extra for that.