Summary of New Repair Regulations Real Estate Rentals

Summary of

New Repair Regulations

Real Estate Rentals

 

This summary is for our Real Estate Rental clients in connection with the new Repair

Regulations (AKA Tangible Property Regulations effective for 2014 Tax Returns)

The new “Repair Regulations,” which are very complicated are the IRS’s attempt to clarify

when costs may be currently deducted and when they must be capitalized. The newly issued

tax rules can make the expense-or-capitalize decision easier for your Real Estate Rentals.

These Repair Regulations provide guidelines and safe harbors to help you determine when

certain purchases and expenditures are considered repairs, maintenance, improvements,

materials, or supplies that can be deducted in the year of purchase.

Safe harbors in the new rules

Here is an overview of safe harbor rules that may affect the way you classify expenses.

1. De minimis purchases

In general, you can deduct the cost of tangible property purchased during a taxable year if

the amount you pay for the property is less than $500 per invoice, or per item. This is an

all-or-nothing rule, meaning if an asset costs more than $500, you cannot take a partial

deduction.

To take the deduction, you will need a written accounting policy in place by the beginning

of your tax year, and you are required to file an annual statement with your federal tax

return.

Tax Tip: It makes sense to keep each invoice under $500 where possible.

2. Repairs and maintenance

You can expense costs for routine maintenance of buildings and other property. For

buildings, “routine” means maintenance you expect to perform more than once in a ten-

year period. The costs for material additions or defects or for adapting your property to a

new or different use are not considered routine maintenance, and they should be

capitalized.

3. Improvements

Generally, improvements you make to your business building are capitalized and

depreciated over the life of the building. Under the new rules, if your business’s gross

receipts are ten million dollars or less and the unadjusted basis of your building is one

million dollars or less, you may choose to write off the cost of improvements.

You can make the election annually on a building-by-building basis for property you own

or lease by filing a statement with your tax return. To qualify, the total amount you pay

during the year for repairs, maintenance, and improvements cannot be greater than

$10,000 or 2% of the unadjusted basis of the building, whichever is less.

Note: The total includes amounts you deduct under the “repairs and maintenance” and “de

minimis” safe harbors. This safe harbor may be difficult to achieve.

4. Materials and supplies

Incidental materials and supplies (supplies for which you do not maintain an inventory)

costing less than $200 can be expensed in the year of purchase.

Complex regulations, with varying effective dates

The repair regulations are more than 200 pages long. Filled with various effective dates,

requirements, definitions, exceptions, and safe harbors, they are anything but concise and

clear. As with any part of the tax law, these regulations contain numerous complex provisions

that could result in tax savings or additional costs for your Real Estate Rentals or your

business. Please contact us if you have any questions regarding these new regulations as they

are very complex and evolving.