Change in Repair/Capitalization Rules – Part 1


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To deduct or not to deduct? That’s always been a question for real estate investors when it comes to repair expenses. In some cases, the expense is a deductible repair expense and in other cases, it’s a capital expense that you need to treat as an asset and then depreciate over a period of years. That period of years could be as long as 39.5 years.

The IRS has new regulations that have become effective for all years beginning on or after Jan 1, 2014. In today’s and tomorrow’s blog entries, I’ll briefly go over the new rules.

This applies to all real estate investors.

Let’s start off with a few exceptions. If these apply to you, you don’t need to worry about the rest of today’s and tomorrow’s blog entries. But you may want to make sure your CPA knows what is going on. This will all come into play on the tax return for 2014. Plan now!

If you have a building with an adjusted basis of $1 million or less, you do not need to apply the new improvement rules for expenditures of less than $10K. For expenses of $10K and above, you do need to check the rules with your CPA.

There is also an ‘out’ for businesses that have audited financial statements. In that case, they have a safe harbor rule for expenses under $5,000. However, small businesses usually don’t have audits and so their safe harbor rule is only $500. Over that, they need to look at capitalization rules. In tomorrow’s blog, I’m going to go into more detail on the tests.


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