Rental Property Repairs Safe Harbor (revisited)

By Jason Watson, CPA
Posted Saturday, September 7, 2024

There are three safe harbors relevant to rental property owners and real estate investors-

• De Minimis Safe Harbor Election

• Safe Harbor Election for Small Taxpayers (sounds a bit condescending)

• Safe Harbor for Routine Maintenance

This section is a mini me of our rental property repairs safe harbor section. Here is a quick summary-

De Minimis Safe Harbor Election

We’ll start with the easiest one. As outlined in IRS Notice 2015-82, the IRS increased the de minimis safe harbor threshold from $500 to $2,500 per invoice or item for taxpayers in 2015. What does this mean? Anything you purchase including repairs and maintenance that are $2,500 or less per line item on an invoice may be expensed and therefore deducted immediately (versus capitalizing as a fixed asset and depreciating).

Safe Harbor Election for Small Taxpayers

For the little people in the real estate investment world, we have a practical safe harbor for expenditures that would otherwise be deemed improvements requiring them to be listed as a fixed asset and depreciated. Yuck.

Two criteria-

• The building’s unadjusted cost basis is $1 million or less. This excludes land, land improvements, and personal property identified through a cost segregation study.

• You have less than $10 million in gross rental income across all activities.

If you meet these, then if the total amount paid during the taxable year for repairs, maintenance, improvements, or similar activities performed on such building property are under 2% of the unadjusted cost basis and under $10,000, they may be expensed immediately as repairs and maintenance.

Safe Harbor for Routine Maintenance

This one is a bit trickier, but certainly a nice and mostly underutilized safe harbor for rental property owners. According to the tangible property final regulations, you are not required to capitalize as an improvement, and therefore may deduct, amounts that-

• Keep the property in its ordinarily efficient operating condition, and

• You reasonably expect, at the time the rental property is placed in service, to perform the improvement more than once during the 10-year period beginning when placed in service for building structures and building systems, or more than once during the life of the unit of property for property other than buildings.

There is no clear answer as to what routine maintenance is, but the regulations provide a zillion examples and explanations regarding the requirement under Treasury Regulations Section 1.263(a)-3(k)(7). There are a total of 31 examples if you cannot get enough. The IRS shapes some thresholds, such as the 30% threshold that you see in other materials.

As mentioned earlier, this is a high-level summary. See our rental property repairs safe harbor section for thrilling details.