When Can Your Home/Land Improvements Be Deducted in One Year?

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Did you buy a fence, install a patio or deck, or remodel a room in your home this year?

If so, it’s possible that you might be able to claim these expenses in one year rather than depreciating them over many years.

Before this new rule, family child care providers had to depreciate a fence, patio or driveway over 15 years and home improvements over 39 years. So, this new rule will be a major tax benefit to some providers.

A new IRS Regulation (Treasury Regulation 1.263), called the Safe Harbor for Small Taxpayers, allows family child care providers to deduct some home improvements in one year if the expenses meet the following qualifications:

The cost of all house repairs/maintenance and home improvements (including land improvements) cannot exceed the lessor of $10,000 or 2% of the unadjusted basis of your home.

Let’s sort this out by first looking at what expenses can be applied to this rule.

House Repairs/Maintenance

Repairs and maintenance refer to expenses that help maintain the value of your home

Examples include: painting (inside or out), fixing broken glass, furnace cleaning, patching the driveway, installing corner wall guards, plumbing repairs, lead paint removal, tree removal, salt for a water softener, wallpapering, window repair, carpet or rug cleaning, etc.

Do not count repairs to your personal property (items not attached to your home or land) as part of this rule. You can always deduct these items in one year. Examples: re-covering a couch or chair, repairing a computer or washing machine, or fixing broken toys or household items.

Home/Land Improvements

Home or land improvements are expenses that result in a “betterment” to your property. Examples of home improvements are: new deck, new furnace, kitchen/bathroom/basement remodeling, add an addition to the home, etc. Examples of land improvements are: new fence, patio or driveway.

Add up all of your house repairs/maintenance and home/land improvements each year.

Deduction Limitation

You can deduct these expenses as long as they are the lessor of $10,000 or 2% of the unadjusted basis of your home. The unadjusted basis of your home is the price you paid for your home (minus the value of land at the time you bought it, plus the value of any home improvement you made before and after your business began).

So, if the unadjusted basis of your home is $100,000, 2% of that is $2,000 and you could deduct your repairs/maintenance and improvements if they totaled less than $2,000. If your expenses are $3,000 you cannot apply this rule to the first $2,000. If they total more than $2,000 you can deduct the home repairs/maintenance in one year, but you must depreciate home/land improvements.

If the unadjusted basis was $200,000, the limit would be $4,000 ($200,000 x 2% = $4,000). If the unadjusted basis was $400,000 the limit would be $8,000. If the unadjusted basis was above $500,000 then you would be limited to $10,000.

We can see how this all comes together with the examples below. We will use a Time-Space Percentage of 40% for these examples.

Example #1

Bernice installed a new deck for $4,500 and made no home repairs. Her home’s unadjusted basis is $250,000. Because $4,500 is less than $5,000 ($250,000 x 2% = $5,000) she can use this rule. She could deduct $1,800 for the deck in one year ($4,500 x 40% = $1,800), rather than having to depreciate it over 39 years.

Example #2

Bernice installed the same deck but also spent $2,000 on house repairs. She can’t use this rule because the $6,500 of repairs and improvements ($4,500 + $2,000) is higher than $5,000. She can deduct $800 of the repairs ($2,000 x 40% = $800) in one year, but she must depreciate the deck over 39 years.

Example #3

Maureen bought a fence for $8,000 and made no other home repairs. The unadjusted basis of her home was $350,000. She cannot use the rule because $8,000 is more than $7,000 ($350,000 x 2% = $7,000). Therefore, she must depreciate her fence over 15 years as a land improvement. If she was required to install the fence, she could depreciate the full price.

Example #4

Keri had the following expenses in one year: $4,000 kitchen remodel, $500 to re-cover a sofa, $600 deck stain, $250 furnace and duct cleaning, and $150 computer repair. The unadjusted basis of her home is $260,000. Her deduction limitation is $5,200 ($260,000 x 2% = $5,200). She can deduct separately the business portion of her sofa and computer expenses because these are considered repairs to her personal property, not to her home. The remaining expenses total $4,850 ($4,000 + $600 + $250). Since this is less than $5,200 she can deduct $1,940 ($4,850 x 40% = $1,940) in one year.

Example #5

Arnetta had the following expenses in one year: $3,600 new kitchen floor tile, $500 to paint the outside of her home, and $600 to repair her stroller, bicycles, and dehumidifier. The unadjusted basis of her home is $200,000 ($200,000 x 2% = $4,000). Her house repairs and improvements are $4,100 ($3,600 + $500), so she can’t use this rule. She must depreciate her floor tile over 39 years and can deduct the $500 paint and other repairs in one year. If she didn’t paint her home that year she could deduct the floor tile in one year.

Annual Tax Statement

If you use this rule you must attach a statement to your tax return indicating that you are electing to use this rule:

The statement should read:

“Section 1.263(a)-3(h) De Minimis Safe Harbor Election

Your name _________________

Your address __________

EIN or Social Security Number __________

For the year ending December 31, 2015 I am electing the safe harbor election for small taxpayers under Treas. Reg. Section 1.263(a)-3(h) for the following: (list your improvements).”

This rule must be elected each year you want to use this rule. If next year you didn’t purchase any home improvements you would not file this statement.

To take advantage of this rule you may want to make some home repairs or improvements this month, or wait until next year.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.flickr.com/photos/tgaw/


Categories: Deductions, Depreciation and Home, Record Keeping & Taxes

21 replies

  1. Dear Mr. Copeland,

    Is there any reason child care providers cannot look to the guidance of example 28 of Treas. Reg. sec. 1.263(a)-3 (k)(7) instead of the safe harbor rule for small tax payers to possibly reduce what expenses must be depreciated.

    For instance, in example five above if Arnetta had a tile floor in her kitchen previously and replaced that older tile with an updated look, is there any reason that Arnetta could not treat the tile as a deductible repair (assuming the kitchen floor is not a “significant portion” of the flooring in the home)?

    • You are correct. Replacement of a kitchen tile floor, that is not part of a general remodeling of the kitchen, may be treated as a repair and deducted in one year (using her time-space %).

  2. Dear Mr. Copeland,,

    If i put a roof top solar. Can i deduct cost of solar in the taxes. We use 40.37 % of the home for family child care.

  3. I had to install a fence around my playground (not the whole yard) for TX license. I thought I read I could deduct it but cnat’t find that now. Do I have to depreciate it or can it be an expense required by the state licensing agency. Thanks so much

    • If the fence costs less than $2,500 you can deduct it one year (attach a statement to your tax return saying you are electing to use the de minimus rule). If it costs more than $2,500 you may have to depreciate it over 15 years, but you can use the 50% bonus depreciation rule that allows you to deduct half the depreciation in the first year. You may also be able to use the Safe Harbor for Small Taxpayers rule that allows eligible providers to deduct home/land improvements in one year.

  4. Hi Tom! We painted the exterior of our house in 2015. It cost $3200 and we bought our house in 2011 for $180,000. How do I handle this on my taxes as it relates to these new rules?

    • Painting is a repair. Repairs can be deducted in one year, regardless of their cost. So, multiply the $3,200 by your time-space % and deduct in one year.

      • Do I need to do the safe harbor note for that? I use a program to do my taxes, so the $3200 would go under indirect repairs and maintenance expense for business use of my home? The program then does the time-space % calculation for that along with all of my other indirect and direct home business costs.

        Thanks!

        • Assuming you meet the test, you would put $3,200 as an indirect expense on Form 8829 as a repair. It will then get multiplied by your time-space %.

  5. Can I use the safe harbor rule for a repair if we put in a new furnace and AC and it is 2% of the unadjusted basis of our home? This was done in 2014 and we depreciated it over 39 years…can we go back and amend this and deduct last years depreciation for this and claim the rest of the money for this repair in 2015 taxes?

    • It doesn’t look like you can amend your tax return to take advantage of this rule. The rule talks about electing this with a timely filed tax return with a statement attached to the return saying you are electing the rule. I haven’t seen anything that says you can amend to use this rule if you didn’t originally elect it. You could ask a local taxpayer or the IRS directly, but that’s my opinion.

  6. Hi Tom,
    How about replacing the roof! it cost me $7800. what rule does apply for this case?
    Thank you in advance for your help.

    Walker

    • If you just replaced the shingles you can treat it as a repair and deduct the time-space % cost in one year. If you also replaced the roof structure underneath then it’s a home improvement that is depreciated over 39 years. If you meet the Safe Harbor for Small Taxpayer rule as described in this article, you can deduct it in one year.

  7. Thank you very much for your quick response

  8. I am confused as to the less than $10,000 OR 2% basis of your home. Can it just be $10,000 or less? Or does it have to be both? I replaced my driveway as it had gigantic pot holes for $6000. I also extended my patio for $4600. The adjusted basis of my home is approximately $150,000. Can I deduct $10,000? or is it the 2% rule? Thank you.

    • 2% of your $150,000 home is $3,000. Since $3,000 is less than $10,000 you must use $3,000 as the limit for this rule. Therefore, since your new driveway is more than $3,000 you must depreciate it over 15 years as a land improvement and the same thing for the patio. However, you may use the 50% bonus depreciation rule and deduct half of the depreciation in 2016.

  9. I have not seen any comments on using the Simplified Option vs Regular method for Home Office Deductions whereby you are not required to use depreciation. A possible advantage of the Simplified option is that you do not have to recapture deprecation on any gain when you sell your house.

    Can you talk about this gain upon sale of house, as I am told that people need to be aware if you sell your house for a gain and that you have been depreciating part of it, all the gain is not tax exempt as it normally would be had you not depreciated. That gain could be taxed at a higher than normal capital gain rate as well. Is this true?

    Thanks for your help.

    • 99% of providers should not use the Simplified Method that allows providers to claim house expenses without receipts. That’s because providers will be better off claiming house expenses on Form 8829. I’ve written about this on my blog: http://tomcopelandblog.com/new-simplified

      If a provider used the Simplified Method she wouldn’t be entitled to claim house depreciation for that year and she wouldn’t have to pay taxes on it when she sells her home. But, it’s always financially better to depreciate your home even though you will have to pay taxes on the depreciation when you sell it. IRS rules say that you will owe taxes on the depreciation your claimed, or were entitled to claim, when you sell your home. If you are entitled to depreciate your home you will be taxed on it even if you didn’t depreciate it. Now, if you use the Simplified Method you won’t owe depreciation for that year. The tax on the depreciation is never higher than 25%.

  10. Are these Safe Harbor deductions for repairs and improvements indicated above, recorded on the 8829 in Repairs and Maintenance or in Special Depreciation rules, line 14 of the 4562?

    Are the Safe Harbor deductions for items costing less than $2500 recorded on the Schedule C, Line 27a (Other).

    Statements indicating the use of these deductions are included with both, correct? Is the same statement?

  11. Record the Safe Harbor deductions for home improvement/repairs on Form 4562, line 14. Any individual item (not part of a larger home improvement) that costs less than $2,500 go on Schedule C, line 27a. There are two different statements to attach to your tax return, one for the Safe Harbor rule and a different one for the $2,500 rule.

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