Originally posted by @Joe Splitrock:
Originally posted by @Brian Poppleton:
Originally posted by @Natalie Kolodij:
Originally posted by @Brian Poppleton:
You would write off the total 12k purchase price disregarding the loan.
The new tax code increased what is called the "diminimus safe harbor" to $2,500. This means any improvement you do that is less than $2,500 can be classified as repair and expensed in first year. Possibly the 12k total cost can be broken into chunks less than $2,500. Depends how it was invoiced. Then you can get the full write off the first year. Otherwise you would get about $400 deduction a year (vs $12,000 upfront). Run this by a good CPA and they can save you some money.
This isn't the correct way to apply this safe harbor as mentioned below. It doesn't depend how it was invoiced- it depends on the actual renovation.
Thanks for pointing that out. In your experience what kind of documentation does an auditor want to see to show that specific items of a renovation are under $2,500 and qualify for safe harbor?
Say someone pays for 12 windows to be replaced. Each window costs $1,000. if the invoice lists each window on a separate line item for $1,000 each and total $12,000. Would an auditor accept this as proper documentation to use safe harbor? What other documentation might be needed?
I am not an accountant, but I am a logical thinker. If you could do what you are saying, you could rehab an entire house and as long as each line item didn't exceed $2500, you could claim safe harbor. If that is what they intended in the law, why would there be any limit in the first place? Everyone would just ask their supplier to break out every invoice into line items that don't exceed $2500.
This seems pretty transparent and risky.
Hello Joe. Thanks for your response. here is some food for thought.
Most of us CPA's are naturally logical, right brain, linear thinkers. The problem is that the tax code was written by lawyers that are left brain non linear thinkers. Different parts of different codes sections all apply simultaneously on one tax position. Hard for us right brain thinkers to get our heads around. Also every single word in the law counts. Us CPA's are good with numbers and not always words.
I am glad you are looking at what the intention of the law. To me it looks like the policy makers want to incentivize real estate investors more than before. Look at tax benefits of 100% bonus depreciation combined with cost segregation. I look at the de minims being upped from 500 to 2500 as another government incentive to be a real estate investor.
It would be nice to expense a whole renovation as repairs. In theory it is possible but, in my opinion, not likely to be pulled off legit. The IRS has anti abuse rules. Sec. 1.263(a)-1(f)(6)
In Notice 2015-82 https://www.irs.gov/businesses... it states "you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to 1-1-2016) per invoice or item (as substantiated by invoice)." What constitutes an item? Does anyone have any IRS guidance or court cases that explains the definition of an item? Can one window be one item?
Also check out https://www.therealestatecpa.c...
At the end of the day, the point I am trying to make, is to make sure your CPA at least is looking at all renovations and pulling out everything that legally can be expensed. If they tell you it all has to be capitalized without even looking at it, they are costing you a lot more than their fee.
