If you have real estate investments, today’s blog is for you.
A few years ago, the question of whether you have a repair expense (and deductible) versus an improvement (and an asset that is depreciated over time) was answered by a series of regulations known as “tangible property repair” regs (TPR). The regs spelled out things in great, and often, confusing detail.
One complaint after the fact was that the regs were too hard for the small real estate investor to follow. Two big changes happed as a result of that.
- You can elect to use the $1 million safe harbor provision. If your real estate property has a basis of less than $1 mill, you are not subject to the more onerous part of the regulations. Make sure your tax preparer makes the proper election on your tax return.
- If an invoice is under $2500 (products and/or service), you can expense it as a repair expense.
The first one is definitely helpful. Make sure you or your CPA makes that election.
The second one, though, might mean you should take a second look. In 2018, there is the opportunity to reduce taxable income of your pass-through entities. Your real estate investments are likely held within a pass-through entity or reported just on a Schedule E of your personal return (also a pass-through entity). If your taxable income is under the threshold ($315K for married filing jointly or $157.5K for single), take all the deductions that make sense. It won’t matter.
If your taxable income is above the threshold, your tax reduction will be limited to the greater of 50% of wages paid or 25% of wages paid plus 2.5% of depreciable assets. And that is where the problem might occur. If you expense items as repairs, you will reduce your depreciable assets and that means you might have less of a tax reduction possible.
Which is the right choice? It will depend on your taxable income and whether you have pass through income from your real estate.
Make sure you’re working with a tax pro who is familiar with the new tax act.