Depreciation - Small Taxpayer Safe Harbor for Rental Real Estate

[Steve Stang]

I have a client who owns and occupies a three-family rental. Last year he remodeled the kitchen. I figured that the cabinets would be classified as fixtures and depreciated over 7 years. Same for the floor. But I was reviewing TTB and found the following on 7-6: The expenses capitalized for improving
property can be depreciated as if the improvement were separate property. [Reg. §1.263(a)-3].

So, given the fact that the client seems to meet the definitions for a small taxpayer and the property is valued well under $1m, does it make sense to simply write off the entire $2900 for the remodel? It certainly seems to make sense. I know that this is a new provision but has anyone done this and how do you document it for the submission? TTB references including a statement with the return.

[TXEA]

yes, just remember to prepare the election. See my other post about this by clicking on my profile.

you mentioned the taxpayer owns and occupies the rental. Is this a triplex where he lives in a separate unit or is the kitchen a common area for all tenants? If common area, this may be completely nondeductible.

[Burke]

So, does your software have some kind of code to allow this?

[ddoshan]

TTB does mention that ... if the total amount paid during the year for repairs, maintenance, improvements, and similar activities do not exceed 2% of the unadjusted basis of the building. Note total amount for all of the above. Not just for a couple of specific projects.

[TXEA]

My software (Ultra Tax) does not have the election as a preset, so I had to manually prepare the election in the software.

[Steve Stang]

Owner Occupies Own Unit

yes, just remember to prepare the election. See my other post about this by clicking on my profile.

you mentioned the taxpayer owns and occupies the rental. Is this a triplex where he lives in a separate unit or is the kitchen a common area for all tenants? If common area, this may be completely nondeductible.

In response to your comment, the taxpayer occupies his own unit in a three-unit property.

[Burke]

... if the total amount paid during the year for repairs, maintenance, improvements, and similar activities do not exceed 2% of the unadjusted basis of the building. Note total amount for all of the above. Not just for a couple of specific projects.

"Unadjusted basis" meaning the original basis not adjusted for depreciation taken?

[TaxGuyBill]

"Unadjusted basis" meaning the original basis not adjusted for depreciation taken?

I think so.


(5) Unadjusted basis—(i) Eligible building property owned by taxpayer. For purposes of this section, the unadjusted basis of eligible building property owned by the taxpayer means the basis as determined under section 1012, or other applicable sections of Chapter 1, including subchapters O (relating to gain or loss on dispositions of property), C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses). Unadjusted basis is determined without regard to any adjustments described in section 1016(a)(2) or (3) or to amounts for which the taxpayer has elected to treat as an expense (for example, under sections 179, 179B, or 179C).

http://www.ecfr.gov/cgi-bin/text-idx?SID=a34ea610a639cd23bc4caef1e2412cc8&node=26:3.0.1.1.1.0.5.143&rgn=div8

[ALIMT]

Attached Statement Small Taxpayer Safe Harbor Election

My software (Ultra Tax) does not have the election as a preset, so I had to manually prepare the election in the software.

How did you do that? I also have Ultra Tax. Thanks