IRS Benefits for Small Residential Rental Properties

The IRS has issued the final version of its complex regulations explaining how to deduct repairs and improvements to business property, which includes commercial buildings and residential rentals. The final regulations take effect January 1, of 2014.

One of these is the benefits for small taxpayers is IRS Reg. 1.263(a)-3h. Taxpayers are able to bypass the new complex regulations for year for repairs, maintenance, improvements and similar expenses if the expenses are less than 2% of the unadjusted basis of building (usually the purchase price), or $10,000, whichever is less. One caveat,

Using the “safe harbor for small taxpayers,” the taxpayer may deduct the expense rather than depreciating them over many years. No amount may be deducted if the expenses exceed the annual limit. The limit and safe harbor are applied on a building by building basis.The safe harbor may used on for buildings, condominiums and cooperatives included, where the unadjust basis is $1 million or less. If the taxpayer is leasing the building, the unadjusted basis is equal to total amount of undiscounted rent expected  to be paid over the entire lease term, including any renewals.

Going forward, the safe harbor can be used for the tax year beginning January 1, 2014. Taxpayers may seek to retroactively apply this option to their 2012 and 2013 tax years by filing amended returns for each of those years.

To take advantage of this safe harbor the taxpayer; building owner or lessee, should be keeping track of all their annual expense for improvements, maintenance, repairs and similar items, every year. IRS regulations contain other special rule which may be of value to you.

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