For a change you may actually like these!
The federal tax code book 2012The IRS has issued it’s long and complex regulations that explain how to deduct improvements and repairs to rental properties. The regulations take effect on January 1st, 2014, and offers up several changes that rental owners may find downright pleasant.
IRS Regulation 1.263(a)-3h: The Safe Harbor for Small Taxpayers
This new rule allows an eligible taxpayer to skip out on the complicated new regulations altogether and simply deduct the money they spend on improving rental properties. That is, provided that the total amount paid for repairs, maintenance, improvements, and similar expenses (over the last year) is less than $10,000 and 2% of the building’s cost, and the building’s base cost was less than $1 million, and the amount stays within the applicable annual limit for deductions. Oh, and you can’t make more than $10 million gross across any of the past three years.
Let’s give an example. Let’s say that Royal Rose owns a rental unit worth $400,000 — 2% of which is $8000, so that’s our spending cap on deductible expenses. During 2014, we put a $3,000 security system and $3,500 of new windows on that rental unit. Because we don’t make $10 million/year, we’re allowed to take that $6500 expense and deduct it directly from our taxable income.
If we had instead put in a $5,000 security system and $3,500 of new windows, we would have made $500 more in repairs than the Safe Harbor rule allows, and rather than deducting the amount, we would have to apply the complex depreciation rules that would essentially require us to recover that $8,500 over the course of many years’ worth of tax returns.
Obviously, to utilize the Safe Harbor rule, you’ll need to carefully track all of your annual expenses for ‘repairs, maintenance, improvements, and similar items’ — but any half-decent property manager will be doing that in the first place. If you have your records from 2012 and 2013 ready, you can file amended tax returns for those years and possibly recover a few thousand dollars. The limit is small for less-valuable rentals — 2% of the cost of the building is pretty minimal when you’re repairing a $95,000 home — but for those years when you don’t have much that you need to do, it can be a huge help. It also means that if something major goes wrong, you might as well fix everything you can in the same year, so that next year you can fit back into the Safe Harbor.