IRS - Building Repairs vs. Improvements

The IRS likes to stay 1 step ahead of investors …. Correction, let’s make that 12 steps ahead!
Ever since I began investing there have been headaches when dealing with the IRS and the short term & long term deductions that are available. I was foolish when I started real estate thinking that I could do my own taxes and I’m still foolish in other areas of my life. But I smartened up pretty quickly as I was doing more deals and realized I need a real estate CPA!
Since then I haven’t looked back and Mark has done a phenomenal job for me and my business entities.

Stephen Fishman recently wrote an article for Inman News (http://www.inman.com/2013/09/30/good-news-for-owners-of-smaller-resident...)
entitled, “Good news for owners of smaller residential rental properties” … he basically broke down how the IRS now determines how to deduct improvements and repairs to business property, including commercial buildings and residential rentals.

If you’re an investor with multiple residential rentals, this is a great article.

Fishman said, “This new reg allows a qualifying taxpayer to elect to not apply the IRS’s complex new improvement regs to an eligible building if the total amount paid during the year for repairs, maintenance, improvements and similar expenses does not exceed the lesser of $10,000 or 2 percent of the unadjusted basis of the building (usually, its cost). By making this election, the taxpayer may currently deduct such expenses instead of depreciating them over many years. However, no amount is deductible under the safe harbor if the applicable annual limit is exceeded. The limit and safe harbor are applied on a building-by-building basis. The safe harbor may be used only for buildings, including condos and coops, with an unadjusted basis (usually, original cost) of $1 million or less. If the taxpayer is leasing the building, the unadjusted basis of the leasehold interest is equal to the total amount of (undiscounted) rent paid or expected to be paid over the entire lease term, including expected renewals.”

“The safe harbor is applied on a building-by-building basis by filing an election with a taxpayer’s annual tax return. Once this annual election is made, it may not be revoked. - Example: Sam owns a rental unit with a $300,000 unadjusted basis (that is, it cost $300,000). During 2014, he spent $5,000 on improvements, including $4,000 to install some new windows, an expense that would likely constitute an improvement that would have to be depreciated over 27.5 years. However, Sam qualifies for the small taxpayer safe harbor because the $5,000 he spent on repairs, improvements and maintenance is less than 2 percent of his building’s unadjusted basis (2 percent x $300,0000 = $6,000). By filing an election to use the safe harbor, Sam may currently deduct the entire $5,000 on his 2014 tax return. This allows him to currently deduct the $4,000 he spent on new windows, instead of depreciating the cost over 27.5 years”